8 Tell-Tale Signs an Owner Waited Too Long to Sell
In an ideal world, an owner would sell their company when the timing was “just right.” All the stars would align perfectly — it is a seller’s market; the value would be higher than the owner could ever imagine; the non-financial terms would favor the seller; the buyer would have the knowledge, motivation, and resources to close the deal; and the owner would be ready to move on to the next chapter of their life.
But what if that “perfect setting” never materializes or the owner does not recognize when the time is right to sell their company? Is it possible for an owner to wait “too long” to sell their business? Yes, and there are tell-tale signs that the stars are misaligned and may never realign again:
Sign #1: External forces are driving the owner’s decision to sell their company: Examples: i) A sudden change in the owner’s health precludes day-to-day management of the company and the remaining employees cannot compensate for the owner’s absence or ii) the company suddenly loses a customer that represents a third or more of revenue and the owner does not have the time or energy to rebuild the business. In both cases, the value of the business would be damaged, and the family or owner would be faced with the decision as to how to salvage the remaining value of the company.
Sign #2: When the owner decides to sell their company, options for a sale have decreased or are non-existent: Typical options include sale to a family member, sale to management, or sale to a financial or strategic buyer. From the owner’s perspective, each of these options has its pros and cons; however, as time goes on, the owner may have unwittingly eliminated sale options that could have contributed to their financial and non-financial objectives.
Sign #3: An aging owner will not consider a succession plan: Some owners avoid succession planning believing that they will live forever. This can have a damaging effect on the company as customers who rely on the company’s products and services may question the company’s long-term viability and anxious employees may leave because they are worried about job security should something happen to the owner.
Sign #4: The owner is not proactively pursuing new customers: Instead of making outbound calls to generate new business, the owner is waiting for the phone to ring. The owner may think “I’m making enough money to support my lifestyle, why work harder than I have to?” Obviously, this way of thinking can be detrimental to the company, its future growth, and its long-term viability. This line of thinking diminishes sale value; in addition, the owner will likely not be able to sell the company at a price that will replace their annual compensation.
Sign #5: The owner is running the company for lifestyle and has stopped investing in people, equipment, product development, etc.: Everything feels dated and old — the office, production facilities, products, even the employees themselves — and moves at a lethargic pace. In addition, the owner may let preventative maintenance (“PM”) slip, and/or employees may still be using DOS-based computers from the Stone Age. (This is a little extreme but makes the point!)
Sign #6: Sales and profitability are decreasing and/or the owner has no insight into the company’s future prospects: As a result of lagging or non-existent sales efforts, profitability may decrease. The owner may not realize it, but they are essentially managing the wind down of the company. In this case, the owner has severely limited the attractiveness of the company to potential buyers.
Sign #7: Non-industry buyers approach the owner to acquire the company but pass quickly: Potential buyers may initially seem enthusiastic about a purchase, then quickly come to the conclusion that there is little to nothing to purchase as the company has been managed to a slow wind down.
Sign #8: Industry buyers are only interested in the company’s customers and a few employees and are not interested in acquiring the company: Prospective buyers may only want to purchase specific assets of the company or may come to the conclusion that they can acquire the company’s assets (stated broadly to include customers, employees, equipment, technology, etc.) at little or no cost by waiting for the company to go out of business. Both outcomes leave the owner with the messy situation of liquidating the remaining assets, terminating employees, and managing the wind down of the business. Thus, owners are often faced with the Cornelian dilemma of holding out for better terms (which probably will not materialize) or taking the only offer they may receive and dealing with the carnage – less-than-ideal outcomes.
The bottom line: Owners may not recognize that the opportunity to sell their company has passed until it is too late. At the risk of being redundant: the best time for an owner to sell their company may be when the stars are aligned and the only reason to consider a sale is that ALL OF THE OWNER’S OBJECTIVES CAN BE ACHIEVED IN THE SALE. This, of course, is easier said than done.