Why do we sell our companies?
Recently an important businessman asked me: “Why sell other businessmen your company? Should I be selling mine?”
The most common reasons for doing so:
1. Succession: Many businessmen do not have children interested in carrying on the family business; some study aviation, medicine or art and are not interested in business activities. As the saying goes “the eye of the master fattens the cattle”. Most businesses do not function optimally without the presence and supervision of the owners, for this reason it is common for business employees that they prefer to sell their business before delegating it completely to the employees.
2. The only constant is change: The world of business is constantly changing and it is not always easy to adapt to it. Globalisation and economic openness makes competition more and more difficult, as a result of this some businesses prefer to sell their companies to competitors or foreign companies that want to use it as an internationalisation strategy to enter the local market before taking the risk of losing market share and affect business performance. Changes in regulation, for example the form of hiring construction companies or the changing standards of The National Institute of Food and Drug Monitoring for pharmaceutical companies. They both require many investments and increased working capital. This means many businesses look for strategic partners to invest significant resources or to acquire them to survive.
3. Profit making: Selling a business with good financial indicators today is the equivalent to many years of profits. In order, for a business to grow they are required to reinvest a large proportion of net income. In spite of a business’s ability to generate income, many of the owners usually are not able to fully enjoy it because they must reinvest profits to take advantage of market opportunities, maintain their competitive position and renew assets that guarantee the longevity of the business. It is common to see millionaire owners who are living in a prudent manner sell their business to have liquidity and the free time to complete main life dreams such as; buying a yacht, playing golf everyday, traveling the world and having a comfortable lifestyle.
4. Life is short: The Germans live to work, the French work to live.What good is it to die and be the richest in the cemetery? Many people spend their whole life increasing their income and they die without enjoying it, their wealth is passed on to their heirs. I think that life is full of life experiences, servings other and leaving a legacy to society. Its important to find a balance between your work, family life, relaxation, spirituality, fun and wealth.
Why have unlimited money to travel when you no longer have the health to do so?
Enjoy the early years of your children or grandchildren it is something that can only be done at certain points in life. For me, the ideal situation would be to sell the business at the time that these resources will allow you to have financial freedom and do all those things you always dreamed of.
5. The Business Cycle: Businesses are like living organisms when born, they reproduce and they die. Who could imagine a few years ago that Nokia, Blackberry and Palm would be the ugly ducklings of the cell phone industry? or that changes in consumer taste have affect the sales of McDonalds?
A good friend says “sell the bread whilst hot”. It is better to sell the business during the phase of life when it is valuable and attractive to others. Once the business is in the decline stage of the life cycle it becomes less attractive and therefore more difficult to sell.
6. Country Risk: In Latin America there are high risk countries in terms of politics, the economy, currency etc.) When would Venezuelan and Argentinian companies have thought they would have sold their businesses a decade ago? The country risk has a high impact on the value of the businesses. In Argentina one can acquire a company and recover the capital invested over 3 or 4 years, in Colombia the same process takes normally 5 to 8 years, therefore the sale prices of traded companies reflect normally not only the state of the business (idiosyncratic risk) but also the general risk of the economy and of the country (systematic risk). Colombia remains one of the 3 most attractive countries in South America in which to invest in alongside Peru and Chile. This makes many foreign investors interested in acquiring companies in our country; however, we do not know when we will enjoy a good reputation internationally especially now with tax instability, a slowing economy and increased insecurity. This may be the best time to sell your company, tomorrow may not be.
7. Financial and Economic Crisis: The financial and economic crises repeat themselves periodically. A major setback in the stock market of China, a default on Greek debt and a decline in the value of real-estate in some cities and markets in Colombia is expected. Also the FED is expected to raise the benchmark interest rates which will affect the Riester free rate (Rf) and the value of all the companies in general. When crises come it is more difficult to sell a company at a good price so it is imperative to take advantage of good economic times to take good profits.
8. Unexpected Opportunities Some business do not think to sell their companies when a buyer unexpectedly knocks on their door. In these cases, its best to listen to the offers and despite the good performance the business has. To sell at a good price can be very attractive. “Nobody has ever gone bankrupt taking profits”
In conclusion, the response that I gave to the entrepreneur who was exploring the opportunity to sell his company to an interested strategic investor in buying it was simply, evaluate the price the investor is willing to pay. If the price is attractive it is an excellent opportunity, if there are no other personal motivations to sell; If it is not then it is best to continue growing the company and sell it later.
Finally, remember that any person can sell a business directly without the use of an investment bank, the key is to sell it to the highest bidder and in the best conditions and in order to do that, it is essential to have great advisors to help you maximise the sale price. Just as you would not go to your GP to have plastic surgery, do not expect to sell your company in the best manner without the help of an investment bank.