Let’s first look at who we are as an industry. Almost all of the companies in our industry are privately held, either by one individual, a family, or friends. Most likely, the company represents the single largest asset in those persons’ holdings and is also the least liquid asset of the current holdings and future estate.
At some point, the owner needs to consider a way to convert the asset into cash. If they do not, it is done for them in their personal estate upon death. And generally, at that time, not the best of terms are available.
Here are eleven reasons for the current sales activity we are seeing in the industry:
1. The proverbial offer (possibly unsolicited) that cannot be refused. Many years ago, a large supplier sold at very favorable terms and price. Both the sale and the price were surprising. The owner had adult children in the business. I asked him why he sold rather than plan for the orderly sale/transfer to his children. His response to me – “I am doing better for them by converting the asset at a higher than market value price into cash rather than giving them the company to run.”
2. The marketplace has eager buyers. In an auction, it is said that for it to be successful, it only requires two bidders! Evidently there are many active buyers in our industry, so the timing is right for some to test the waters.
3. There is a feeding frenzy! As sales occur, previously reluctant sellers see the opportunity to enter the marketplace. If so and so did it, so can/should I.
4. Age of the owner. As the owner looks forward to the “golden” years, the time is perfect to convert the asset into cash for retirement planning. At some point all of us who are owners must consider this notion. Selecting a buyer is an entirely different topic. Whether it is family, employees, another industry company, or a financial investor, each with different benefits, it still needs to be done.
5. Status of the economy. We are slowly recovering from very difficult financial times. Maybe the company has finally come back to some level where the owner can sell at a more favorable price and/or term. Quite possibly there are more options and alternatives during recovery times like these.
6. Tired of the risks of ownership. The vision of the owner changes over time. The appetite for risk/reward is greater in younger years and usually frowned upon in later years.
7. No succession management. For whatever reason, there is no one to take over. Maybe there are no “qualified” children in the business. Maybe the owner never delegated sufficiently. If the company could not function without the owner, it may be time to sell. Regardless, there would be a void and irreparable harm without new ownership.
8. Need for capital for the business. We are an industry of many under capitalized companies with few barriers to entry. As a result, quite a few industry colleagues never had the proper level of capital needed to compete and grow. A sale to a stronger player may be warranted.
9. Estate planning. It is critical to be able to provide liquidity for the estate of the owner. Depending upon current tax laws, the taxes have to be paid regardless if the asset is liquid. Just read about farmers whose heirs had to sell the land in order to satisfy the estate taxes.
10. Burned out. It is all too easy for an owner to burn out. There was a business book many years ago written by a former CEO at Avis, David Mahoney, who argued for a CEO limit of one five-year term. He believed that after five years the company would need fresh blood and fresh ideas.
11. No vision for an upside in growth and profits. It is entirely possible that the sellers do not see upside potential, driving them to walk away now. If they could increase the upside, it would generate a better sale price.