Why Do Business Owners Exit?

Executive Summary

Small vs. Mid-Sized Businesses

• The decision to sell tends to be much less emotional for owners of mid-sized to larger businesses than for smaller businesses.
• The decision to buy is rarely emotional for professional investors.

Common Reasons

Business owners usually sell for one of three primary reasons:

• Personal Reasons: Boredom, Burnout, Death, Disability, Disputes, Divorce, Health, Relocation and Retirement
• Business Reasons: Business Problems, Competition, Growth, and Other Opportunities
• Financial Reasons: Diversification, Opportunistic, Financial Pressures, and Taxes

Advice to Sellers

• Plan for the sale in advance to minimize the impact of unforeseen circumstances (death, disability, disputes, health problems, etc.).
• Prepare emotionally for the sale process. Accept that it may be very emotional for you, and prepare to address any emotional roadblocks that may arise.
• Clarify your reason for the sale so you can explain it to buyers in a concise, persuasive manner that does not cause them to doubt you.
• Always be honest with the buyer. It’s very difficult to keep a secret throughout the sale process. If they find out you’ve been untruthful, they may be able to sue you, depending on how the representations and warranties are worded in the purchase agreement.

Advice to Buyers

• Find out the real reason the owner is selling. Dig deep and ask multiple times to ensure consistency.
• Address the seller’s emotions to mitigate their impact on the process and to avoid any last-minute change of heart.
• Consider keeping the owner involved in the business after the sale, which can lend enormous value.

Introduction

As a business owner looking to exit, you may be curious to know if your reason is unique or if it matches the general pattern laid down by your contemporaries. 

Remember, you’re about to sell the ultimate “pre-loved” product – your business – so the question of “why are you selling” is a natural one. Largely, it’s a matter of instilling trust in the buyer. It’s important they find your reason compelling, or they’ll become suspicious. 

At Morgan & Westfield, we’ve seen every reason for selling in the book. Chances are, we’ve successfully assisted a seller in a similar situation to yours.

In this article, we explore the many reasons you might decide to sell and ways to prepare for the transition based on your specific circumstances.

Small vs. Mid-Sized Business Exits

For professionals who regularly buy and sell businesses, the decision to sell will be less momentous than for the owner of a family business. In fact, it can be as straightforward as where to go for lunch. The decision usually starts with management and then goes to the board for approval. The board then hires an investment banker to handle the sale. The consequences may depend on whether the board is selling a standalone entity, a division, or a subsidiary. 

For a family-owned business, the decision to sell can be emotional and gut-wrenching. It may bring about major life changes for the entrepreneur. If you own a family business, planning for the sale and thoroughly exploring your motivations are key to ensuring a smooth transition.

Advice for Buyers and Sellers on the Reason for Selling
Reason	Advice for Buyers	Advice for Sellers
Retirement	Find a new passion to keep you busy. Create an exit plan in case your health fails before you can exit.	Offer the seller a continued role in the business, often at below-market rates.
Health Problems	Prepare for the exit as soon as possible to avoid leaving money on the table.	Sympathize with the owner. Trust but verify the owner’s claims.
Burnout	Be honest with the buyer regarding your burnout. Attempt to restructure the business to focus on your strengths before you consider selling.	Ask why the owner is burned out. Restructure the business to avoid the same thing happening to you. Focus on your strengths and delegate everything else.
Boredom	Focus on building value before exiting.	Learn to recognize the signs of boredom vs. a declining business.
Partner & Family Disputes	Create a buy-sell agreement that has a mechanism for resolving disputes and offers all partners exit options.	Ensure all partners agree before you invest time in negotiations.
Lack of profit	Focus on selling the business to someone within the industry.	Previous turnaround experience is best. Ask the seller to remain to assist.
Relocation	Plan your exit well in advance so you don’t leave money on the table.	Verify the seller’s relocation plans to ensure they’re genuine.
Economic	Communicate your earnest desire to sell your business. Avoid coming across as abrasive or only concerned about the economic aspects of the transaction.	Avoid investing too much time before agreeing on a price. Sellers in this category may be inflexible, so be prepared to walk or give in on key points.

Why Do Business Owners Sell?

Business owners usually sell for one of three primary reasons:

• Personal Reasons
  • Boredom
  • Burnout
  • Death/Disability
  • Disputes
  • Divorce
  • Health 
  • Other Opportunities
  • Relocation
  • Retirement
• Business Reasons
  • Business Problems
  • Competition
  • Growth
  • Other Opportunities
• Financial Reasons
  • Diversification
  • Opportunistic
  • Financial Pressures
  • Taxes

M&A Exit: Personal Reasons

Boredom

One of the most recurring reasons for selling a business is boredom or lack of interest. This is common to many industries and isn’t usually a cause for concern for buyers. 

Boring Industries

Certain industries, such as retail, can be prone to boredom if they don’t present enough challenge to the owner, and the daily grind and monotony may quickly bore a restless entrepreneur. Some lose interest in industries in which they can’t fully express their entrepreneurial creativity. 

Franchise Owners

Boredom may also be common with franchises, in which you must follow a specific formula, as opposed to innovating and creating a business model from scratch. 

Do I Need to Hide My Boredom?

Boredom is sometimes masked as “other business interests” by the disenchanted owner. Some believe they should hide the fact that they’re bored or tired. We don’t believe boredom is a game-breaker and see no problem in disclosing it to buyers.

Start-Up Entrepreneurs

Other owners enjoy building a business but not running it. They enjoy the thrill of the startup phase and are looking for the next exciting idea to chase. This shouldn’t be a warning sign for a buyer. Everyone is wired differently. 

You’re selling the ultimate “pre-loved” product – your business – and the question of “why are you selling” is a natural one.

While an entrepreneur may find the everyday monotony of running a business tedious and uninspiring, it may be exactly the type of business a buyer is looking for. This type of owner often has a drawer full of ideas they’d love to work on, and by selling, they can use the extra capital to jumpstart the next. Such entrepreneurs should focus on building substantial value before considering an exit.

Burnout

Disclosing Burnout

Burnout is a legitimate reason for selling a business, but many sellers believe they must keep their exhaustion a secret from the buyer. Many are tired after working 50 to 60 hours per week in their business, with no vacations for decades, and buyers will understand that it’s not related to weak profits or a faulty business model. 

Restructuring the Business

It’s more likely that burned-out sellers simply haven’t built processes and a management team that properly allows them to escape the business and rejuvenate regularly. Such owners must elicit help from their team to build proper infrastructure, capitalize on their strengths, and delegate everything else.

Often, the business can be restructured, and talent can be hired to allow the owner to focus solely on what they enjoy and do best. While the infrastructure learning curve is steep, those who build it successfully find the journey is worth the effort.

Death or Disability

Death is a traumatic event for all parties involved. Without proper planning, an untimely death can drastically reduce the value of a business overnight. A thorough exit plan can help prevent degradation in the event of a death or disability.

Disputes

Arguments among family members or partners are all too common in business. When these problems are irreconcilable, the owners may decide to sell, which may represent an opportunity for a buyer. Problems can be friendly disagreements, such as discussions over key strategic decisions, or they may be unfriendly, such as arguments over personality differences. 

Importance of a Buy-Sell Agreement

A buy-out agreement can prevent these disputes by creating a framework for handling such issues. It’s critical for any business with partners, including family members and spouses who co-own a business, to create a buy-sell agreement that offers everyone a method for selling their interest or purchasing another partner’s in the event of a dispute, death, disability, or other crisis.

Exit Options

It’s common for partners to disagree on many issues in the business, and if they come to a standstill, they may have no way out other than selling. There may be insufficient cash available to buy out other partners, or they may be unable to agree on a price, and there may not be a buy-sell agreement in place to resolve these problems. If buying out a partner isn’t possible, the company is often put up for sale. 

For larger companies, the decision usually starts with management and then goes to the board for approval. The board then hires an investment banker to handle the sale.

Selling a Minority Interest

It’s difficult to sell a minority interest in a small to mid-sized business, except for recapitalizations by private equity firms. Often the only way out is to sell the entire business.

Divorce

Selling a business while going through a divorce can be a stressful event, but it is a legitimate reason to sell a company. The sale will have to be approved by the trustee. In nearly all cases, it’s wise to obtain the consent of both spouses, even if one party isn’t a shareholder. This is particularly so in community property states.

Health 

Other owners are forced to sell their business due to unexpected health problems. 

Acute vs. Chronic Health Problems

If the health problems are chronic or acute, the owner should begin preparing for the exit as soon as possible. In the case of acute health problems, it’s likely a significant amount of money will be left on the table. 

Telling the Truth About Your Health

Many owners claim to be selling due to “health reasons” because they believe that burnout and boredom aren’t legitimate reasons to sell, or they aren’t comfortable disclosing the real reason. While health is a common and often legitimate reason for selling a business, you should still be on the lookout for other problems it may be masking. 

Building a Business That Runs Without You

Your business shouldn’t be so dependent on you that it collapses in your absence. With proper planning and documentation, your business should be able to survive disasters and run smoothly without you. This not only increases the value of your business but also ensures your peace of mind in the event of a personal catastrophe. 

When Others Get Sick

Your spouse, a key employee, or a manager may also get sick. With proper documentation of your operations, your business should be able to survive disasters such as the temporary disability of an owner or the loss of a key employee. Dependence on a key employee is risky without a backup plan in place. 

Relocation

Many business owners wish to relocate, and for a variety of reasons. Owners in the North may seek a warmer climate in the South. Others may wish to be near their family in time for the arrival of new grandchildren. Whatever the motivation to relocate, it presents a valid reason for selling a business. That said, it can be another default reason given by owners wish to disguise the real one. 

Retirement

Retirement is the most common reason business owners sell their businesses. Though it seems straightforward, there are related matters to consider.  

Pulling the Trigger Too Early

When the owner is a highly driven, type-A personality, they might pull the trigger too early and later regret their decision to step back and relax. It may be difficult for them to go cold turkey and stop working. 

Finding a New Passion

For these entrepreneurs, it’s critical they find a new passion to keep them busy after the sale. A buyer may be able to capitalize on their energy by offering them a continued role in the business. Owners may first balk at the idea, but it may sound more appealing after a month of re-organizing the garage and lounging by the pool. Without a passion keeping their mind occupied, these former entrepreneurs will soon itch for something productive to do.

Pulling the Trigger Too Late

Other business owners may delay pulling the trigger, and their health may begin to fail before they let go. For these owners, it’s important to create an exit plan before it’s too late and the inevitable happens. The exit plan should include objectives such as building a management team and grooming a successor, but every plan is different. It should certainly address what to do in the event of an emergency, such as a sudden health crisis.

Plan in Advance

If you’re thinking about retiring, you should plan well in advance. Only about 30% of businesses successfully transfer to the second generation, and only 15% make it to the third. Discuss the potential with your family well in advance of the sale. It’s never too early to find out if they aren’t interested in taking over. 

Staying After the Sale

Most buyers ask the seller to stick around after the sale to ensure a smooth transition. The thinner your management team, the longer the buyer will want you to stay. By planning for the sale in advance and building a strong team, you will reduce the time the buyer asks you to remain post-sale.

M&A Exit: Business Reasons

Business Problems

Perhaps the owner knows the landlord won’t renew the lease at the end of the current term, or perhaps they know that a major customer may soon go bankrupt. Most savvy buyers will ask sellers to sign a purchase agreement that contains representations and warranties that address these and other unforeseen issues that could arise down the road. 

Competition

If competition is acute in your industry, you should go to market as quickly as possible while you still have a valuable business to sell. Sometimes, an owner knows in advance that competition may adversely affect their business, but this problem isn’t always evident when reviewing their financial statements. 

Growth

Managing Growth

An owner selling because they fail to manage growth is less common, but it happens. Sometimes, a talented sales or marketing-oriented entrepreneur may drive revenue to the point where they have a difficult time handling the extra work operationally or financing their own success. 

The Cash Flow Cycle

This is a common reason to exit for businesses with a long cash-flow cycle, a long sales cycle, or that offer payment terms. In these cases, growth requires working capital that the owner may not have at their disposal. For example, many food manufacturing and processing companies have very long cash-flow cycles and need a significant amount of working capital to grow their business.

Funding Growth

Talented entrepreneurs who can drive sales but can’t fund growth often require outside capital but then find debt financing hard to obtain. Such owners may believe that another industry could offer more favorable financial structures that facilitate organic growth without requiring outside investment.

Other Opportunities

Some owners may simply seek what they believe are more profitable or attractive opportunities. This is often the case with business owners who struggle daily or have friends who appear to be thriving in another industry. Many owners find the lure of greener pastures all too strong. At the same time, their business may be a poor fit for their skill set or passions.

M&A Exit: Financial Reasons

Diversification 

Entrepreneurs who own multiple businesses may claim they want to diversify. For many investors, they’re unlikely to achieve diversification by selling one asset to buy another. When presented with this reason for selling, it pays to dig deeper and verify the owner’s true motivations. 

Recapitalization

Owners who operate a large, successful business may want to take some chips off the table and diversify their net worth. They may be reaching retirement age and may be uncomfortable with such a large portion of their net worth tied to an illiquid asset — their business. Selling a portion of the company creates liquidity and allows the owner to diversify, thereby lowering their risk. 

A recapitalization is different from the sale of an entire company. When structuring a recapitalization, or “recap,” a private equity firm purchases a portion of the company and retains the owner as a key manager with part-ownership. This allows the owner to partially cash out while laying the ground for a second sale in the future. 

Owners who operate a large, successful business may want to take some chips off the table and diversify their net worth.

PE firms can bring more than just money to the table — they can bring industry and operational experience. This often results in a substantial increase in the value of the business.

Opportunistic

Some entrepreneurs, primarily serial entrepreneurs, sell solely for economic reasons. 

Industry Peaks

They may attempt to sell at an industry’s peak, for example. Such owners are experienced and sophisticated and deal with all parties in a no-nonsense way. Typically, they won’t sell unless they achieve their financial objectives.

Unsolicited Offers

Unsolicited offers can either come from mass mailings from M&A firms or a legitimately interested competitor. Few businesses with revenues under $2-5 million per year receive unsolicited offers, but by being prepared, you can negotiate effectively should a buyer approach you.

Financial Pressures

Few sellers admit to experiencing financial issues – doing so is tantamount to failure. 

The Root Cause

While owners may be selling due to financial challenges, the real cause of their troubles may be weak management, fierce competition, the inability to obtain financing, or other challenges in the business. Personal problems can also come into play, such as health or divorce, that affect their ability to manage the business.

Unprofitable Businesses

Some owners decide to sell because their business is unprofitable. Despite their efforts, they haven’t been able to turn the business around and make it successful. In these cases, the buyer should have industry or turnaround experience. They may often retain the current owner to help turn the ship around if doing so requires significant effort. 

These businesses are difficult to sell except to those within that industry, especially if there are little to no assets or proprietary technology to offer value.

Finding the Real Reason

If you discover that an owner is having financial issues, it makes sense to dig deeper and find why. When a seller claims they want to seek another opportunity, the real reason is often that the business has limited opportunity, or so the seller believes. 

When analyzing an unprofitable business, it’s important to determine if the root cause can be fixed. Often, the problem can be resolved with new ownership or management. If the problem stems from external issues, such as intense competition or new industry dynamics, it may not be so easily fixed.

Taxes

The sale of a business triggers capital gains taxes and ordinary income taxes. Favorable changes in tax rates often motivate entrepreneurs to sell.

M&A Exit: Other Reasons

Close Out of Private Equity Fund

Private equity (PE) firms usually operate funds (i.e., limited partnerships) with a ten-year life span. PE firms are often under pressure to liquidate their investments before the end of the fund’s termination date by either selling the company in the private market or through an initial public offering (IPO). 

The PE firm’s rate of return is calculated using the internal rate of return (IRR), which is based on the length of time the investment was deployed. Extending the investment period will lower the IRR. While they can often extend their investment timeframe, they rarely do. 

Private equity firms are often under pressure to liquidate their investments before the end of the fund’s termination date.

While waiting to sell the company may result in a higher valuation, it could also lead to a lower IRR and tarnish their reputation by having to extend the fund’s life. Strategic buyers, on the other hand, are not under the same time pressures as a financial buyer.

The following reasons are less common but do occur:

• A family member takes over the business and doesn’t do well or determines the business is not a good fit for them.
• Some owners consider selling because the business is growing too quickly, and they don’t have the skills or experience to handle a larger company, or they may need capital to grow the business further. Such owners may consider a recapitalization.
• A larger organization may divest a subsidiary that is unprofitable or not in line with the company’s long-term vision.

Multiple Reasons for Selling Your Business

The reasons for a business sale may not be mutually exclusive – many may contribute and connect. 

For example, an owner may need a back operation that requires a three- to six-month rest. They may also be burned out and feel they could benefit from a much longer vacation from the business. It may also be time to finally get rid of that 20% minority partner who does nothing but cause trouble. 

Any one of these issues in isolation may not be enough, but all three in combination might prompt an owner to sell. 

Tips for Business Sellers

Plan for the Sale in Advance

Your business is likely one of your most valuable assets and an important part of your life. Seventy percent or more of your net worth may be tied to the value of your business. 

But most owners are so busy with the day-to-day minutiae that they neglect to plan in advance for the sale. With so much of their net worth tied to the business, this puts them at a serious disadvantage.

It’s critical to be proactive about this process. Decide exactly why you want to sell and what your objectives are, rehearse this narrative with your family and advisors, and plan your exit as soon as possible to avoid becoming a seller before you’re ready. 

Selling a business can be gut-wrenching and emotional. But most owners are so busy with day-to-day operations that they neglect to plan in advance for a sale.

A good exit plan should contain a succession strategy to ensure continuity in the event of a serious issue, such as a health problem, and provide options for exiting the business in the event of retirement, burnout, boredom, or relocation.

For high-growth businesses, an exit plan should address building a management team or a means of generating funds to finance growth. We also recommend a separate buy-sell agreement if there is more than one owner, even if the owners are family members.

There are many reasons an owner might be ready to sell their business, and these can have a significant impact on how the sale proceeds. 

Be Proactive when Deciding to Sell 

Planning to sell is all about building a business people want to buy. By planning well in advance and then proactively managing the process, you can ensure you sell your business for the highest possible price. 

Crystallize your reasons and motivations. Do you want to get out altogether, or do you want to stay involved part-time? What do you want to do after you sell? If you’re unprepared with your responses, most buyers will develop their own ideas about why you’re selling. 

Don’t skip the planning step. Your business is one of your most valuable assets. By starting early on, you will enhance your odds of selling your business smoothly and at a favorable price.

Be Intellectually and Emotionally Prepared

Accept that you’re emotionally attached to your business. To manage the sale effectively, you’ll need to be both intellectually and emotionally prepared. Taking an active role in the sale of your business and maintaining a cool head will help ensure the process goes as smoothly as possible. 

Buyers frequently offend sellers with questions like, “If your business is so great, why are you selling it?” These should be seen as reasonable, not prying. By planning for them, you’ll be able to stay calm and collected during these challenging times. 

As part of their negotiating strategy, some buyers make remarks designed to get you to snap. Be prepared for this, too. Show buyers you’re a savvy businessperson, and they’ll be more likely to respect you throughout the negotiation. The moment you lose your cool, buyers will lose trust and grow suspicious of everything you say.

Clarify Your Reason for Sale

By clarifying your reason for selling, you will:

• Be more prepared
• Be able to negotiate more effectively
• Be able to maintain a cool head
• Be better able to make intelligent decisions

This may be one of the most stressful periods of your life. You may be having partner issues, going through a divorce, preparing for retirement without a successor in the family, or experiencing health problems. You may also be successful but completely burned out. Whatever the case, be honest with yourself, and you’ll simplify the process. 

Honesty is the Best Policy

Honest is the most underused negotiating strategy in M&A. 

Be honest with yourself and your advisors about the real reason you’re considering selling your business. Hiding the truth about why you’re selling your business can kill a deal. Buyers are naturally suspicious of your true motives and will question you multiple times to be sure you aren’t running from a problem child.

Buyers probe for facts throughout the sale, and being upfront will simplify the procedure and increase the chances of a successful deal. If your reason for selling doesn’t fit your facts, expect buyers to probe deeper. 

Buyers are naturally suspicious of your true motives and will ask multiple times to make sure you aren’t running from a problem child.

Rehearse your story with your family members or advisors. If a buyer has made an offer on a business before and the seller was dishonest, expect them to be suspicious of everything. Be prepared for buyers to be cautious — have your documents in order and be ready to back up your reason for selling with proof. 

Tips for Business Buyers

When purchasing a business, it’s critical to assess both the business and the character of the seller. Performing a credit and background check on the seller would be wise if you question the seller’s true motives.

Find the Real Reason the Owner is Selling

When buying a business, one of the most important things you can determine is the owner’s motivation. Find out as early as possible why the owner wants out. Knowing the truth gives you, as buyer, leverage in negotiations. 

Simply ask the owner why they’re selling. If you have doubts or suspicions, keep asking. Don’t be afraid to dig deep and be blunt if you spot inconsistencies in their story. It’s better to risk offending the seller than to be duped into a poor investment. Consider including the seller’s reason for the sale in the purchase agreement, which can take the form of a representation or warranty. 

Address the Seller’s Emotions

Most of the reasons people sell their businesses are emotional. Because of this, it’s important that a buyer addresses the owner’s emotions throughout the transaction, which will significantly reduce your risk.

The longer the seller has owned the business, the stronger their emotional ties will be, and the more these should be accommodated. If the owner started the business from scratch or inherited it from a loved one, emotional ties could be even stronger.

Keep the Owner Involved Post-Sale

In many cases, the buyer may be able to retain the owner in some fashion after the sale. This can work to the buyer’s advantage, as many sellers are willing to stay involved in a limited role to keep themselves busy. The seller continues performing the roles they love that also benefit the business, such as recruiting, sales, or marketing. It’s a win-win.

Even if the seller is relocating, the seller may be able to stay involved remotely by phone and email. For partner disputes, one partner may be willing to remain, either as a part-owner or as a salaried employee. If the business is unprofitable, the owner may remain as a manager or salesperson. 

If an emotionally attached seller can stay on in the business, and a buyer can make use of their skills, it can be a win-win for both parties. 

As for retirement, what better way to ease off the gas than maintaining a part-time role in the business? Health problems? The owner may be able to work part-time, especially if offered flexible hours. Burned out from tasks they dislike? They may be intrigued by the offer to continue in a role they do enjoy. 

Unless the seller is a serial entrepreneur or wishes to start another business, staying involved after a sale can offer significant advantages to both parties.

Conclusion

Unlike selling a house, selling a business is something you’ll probably do just once in your lifetime. And your house sale is child’s play by comparison, even for sophisticated businesspeople.

Less than half of businesses on the market eventually sell. Most of the reasons for failure can be prevented by thoroughly preparing for the sale months or years in advance. 

Whether buying or selling a business, dig deep and understand the true reason for the sale. It’ll help you navigate the process more fluidly and successfully.