They thought the offer was low and they tried to negotiate it up. That’s when I realized that, until then, they’d given no thought to selling and even less to maximizing the valuation of the company.
1. The 6 Reasons A Company Is Sold.
We now tell business owners that there are 6 things that will make them sell their company. They are:
1. Accept an unsolicited offer;
2. Become so ill they are no longer fit to continue running the company;
3. Die young and unexpectedly;
4. Choose to retire;
5. Are no longer able to run the company – but this time because of old age;
6. Die of old age.
Some of the owners laugh, saying that it will never happen to them. Some get annoyed that we even bring it up, saying things like “I’m far too young to have to worry about that now” or “I’m not ready to retire/I will never retire.” But the one thing they cannot do is argue that the 6 reasons are illogical or incorrect.
2. The 2 Common Factors. Then we tell them there are 2 factors common to all 6 situations:
a) They will only get an unsolicited offer, for top dollars, if the potential buyer believes that the business is profitable and strong.
b) They may not have to sell if they become ill – even so ill that they can’t run the business – or if they retire. But if they retain ownership, the company will have to run without them. And to do that it has to be profitable and strong.
c) If they do have to sell because of illness or when they retire, they will only maximize the return on their hard work – get top dollar – if the business is profitable and strong.
d) If they choose to retire; become too old to continue running the business; or die – young or old – they, their estate or their heirs have the same choice. They can either retain ownership or sell. And, once again, to get the most money out of the business it needs to be profitable and strong.
So what does it mean to be “profitable” and “strong”.
3. A “Profitable” Company is one that consistently produces industry beating profits. Why consistently? Because that’s the only test that making a profit is more than just luck. (As an old friend used to say – never confuse success with a growth market.)
Why industry beating? Because what’s to say that even consistent profits couldn’t be improved. What better comparison than with other companies in the same industry? It removes one major variable – because every company in the industry goes through each phase of the economic cycle at the same time. And key indicators are available by either looking at the annual reports of public companies or by using the industry data published either by (some) associations or magazines eg IBISWorld.
4. A “Strong” Company can meet 2 criteria.
One: it can maintain profitable operations despite the loss of one – or more – key personnel. Who are key personnel – the owner and anyone with specialist knowledge which would be hard to replace.
Two: all key balance sheet ratios – liquidity, debt to equity etc. – are in great shape – in other words the company could borrow money from the most conservative of lenders.
What makes a company profitable and strong? I’ll tell you in next month’s bulletin.
By the way there are at least 2 other reasons a company could be sold – divorce and the break-up of a partnership.