7 Bad Reasons Not to Sell My Business

Sometimes business owners don’t want to sell for all the wrong reasons.   The business Owner will ask why they should sell when the business is going well and they are making money?   Here are 7 reasons why business owners don’t sell, and why they should re-think those reasons. 

Reason 1:  The Business is Making Money.  All the proceeds from a business sale are tax free.  There is no capital gains tax in New Zealand.  When you look at how many years of hard work are required to get the same pay back, we can be talking 5-10yrs, it might be a good idea to sell now. Lets look at the example of a business doing $500k EBITDA that sells for $1.75m, that’s approx. 3.5 time profit, Based on standard metrics that business returns $300k after tax and allows $250k of dividends. This equates to a 7 year payback period for the current owner.  7 years?   If the Owner is at the end of their career do they really want to work another 7yrs to get the same payback? 

Reason 2:  Health.  Health is often a reason an Owner looks to exit, especially if they are near to the end of their career. There is no point retiring with lots of $$$ if you don’t have your health.  Some business owners leave it too long to sell. As time goes on motivation and drive decrease.  Maybe they may get burn out, or their health begins to deteriorate, and then the performance of the business suffers.   Sell now.  Have money in the bank and the good health to spend time enjoying the money you have earned over many years of hard work.

Reason 3:  The market isn’t very good at present.  The current market is providing more buyers than sellers, but this will not always be the case.  Currently, the market is favourable, but this is cyclical like many business trends, and will not always be the case.

Reason 4:  Interest rates aren’t great.  Interest rates are allowing potential buyers to borrow money and hence pay more for businesses in the current market; eventually interest rates will start rising again and this will affect the ability of purchasers to pay premium prices for good businesses.

Reason 5:  Business Risk.  Running a business carries risk and there are no guarantees the business will continue at its current rate given the volatility in the business environment.  What all this comes back to is the opportunity cost of staying in the business for too long. From the financial perspective of the business owner, this cost could be a large drop in the value of the business as interest wains and the business inevitably suffers . Take into account the lost earnings this is generally associated with and the value of the time a business owner is spending on their business, and we arrive at the true cost of staying in business too long.

Reason 6:  Commitment to the Business.  If a vendor is considering an exit it is highly likely they are no longer 100% committed to the business and if the owner is no longer 100% committed it is likely a reduction in financial performance will occur.  The optimum time to sell is just before your business is at its peak.  It is important to make plans for a transition before signs of burn-out, apathy and lost opportunity appear on your financial statements.  If you know that retirement or change in circumstances is imminent, start making plans to sell well ahead of time

Reason 7:  Nothing else to do.  Others get to the stage where they are ready to sell and move on, but feel like they still have a good few years left in them. For many, selling their business can be a daunting prospect as often, they have been in their business for a number of years and struggle with the concept of doing something different, or even doing nothing at all.  If an owner can’t get comfortable selling the business, there are options that involve a gradual sell down or a minority sell down.  In other words sell 50% up front and the final 50% in two years or sell and then contract back to the new owner.