Selling a business is an exciting and rewarding process to be part of. It is also very tricky at times as you are faced with something that is continuously changing, something that is out of your control and sometimes something you can do nothing about!
Each phase of selling a business has its own intricacies and nuances. The majority of businesses I sell are in a growth phase, approaching maturity or are in the maturity phase. From time to time, we get faced with a business that begins to enter decline.....this is not good for the sales process. What is worse is if this begins to happen during the sales process and after you have identified and begun talks with a potential buyer.
Let's quickly identify these key phases and understand the characteristics and potential mindset of the buyer when faced with buying a business in each phase.
Growth Phase: The Sweet Spot for Buyers Seeking Opportunity
Characteristics: In the growth phase, a business is expanding (sometimes rapidly), capturing market share, and scaling operations. This phase is marked by rising revenues, increased customer acquisition, and investment in infrastructure to meet demand.
Pros of Selling in the Growth Phase:
- High Buyer Appeal: Buyers are drawn to the promise of future expansion. Businesses in this phase often attract strategic investors or financial buyers looking to scale operations or increase market share.
- Strong Valuation Potential: Growth businesses command premium valuations, as buyers are willing to pay for the potential of increased profitability.
- Market Buzz: A thriving business with visible momentum creates excitement, which can lead to competitive offers.
Cons of Selling in the Growth Phase:
- Operational Stress: Rapid growth often highlights inefficiencies in processes or strained resources, which buyers may view as risks.
- Valuation Disputes: Owners may have high expectations based on future potential, while buyers often discount valuations due to uncertainty about sustained growth.
- Unfinished Business: Sellers may feel they’re leaving value on the table by exiting before reaching peak profitability.
Why Buyers Like Growth-Phase Businesses:
- Scalability: The potential to grow revenues and market share excites buyers with the capital to fund expansion.
- Established Momentum: Buyers gain a head start by acquiring a business with clear upward trends.
- Execution Risks: Growth demands significant resources and operational expertise, which some buyers may lack.
- High Price Tags: The premium associated with growth-phase businesses can deter buyers focused on short-term returns.
- Reasons for sale: Buyers may feel a level of uncertainty as to why an owner may sell a business that is in growth.
Maturity Phase: Stability Meets Predictability
Characteristics: A business in the maturity phase enjoys consistent revenues, a strong market position, and established operations. Growth has stabilised, and the business often operates with efficient systems and processes.
Pros of Selling in the Maturity Phase:
- Stable Cash Flows: Predictable earnings and established customer bases are attractive to buyers seeking lower-risk investments.
- Valuation Confidence: Buyers are more likely to trust financial forecasts due to the business’s proven track record.
- Appeals to Diverse Buyers: Both strategic and individual buyers value the stability and reliability of mature businesses.
Cons of Selling in the Maturity Phase:
- Limited Growth Potential: With growth plateaued, buyers may view the business as less exciting, particularly if the market is saturated.
- Inflexibility: Mature businesses may have rigid systems or cultures, making them less adaptable to innovation or new strategies.
- Pressure on Price: Buyers may negotiate downwards, arguing that the lack of growth caps future returns.
Why Buyers Like Mature Businesses:
- Lower Risk: Established revenue streams and operational efficiency reduce uncertainty for buyers.
- Ready-to-Operate: Mature businesses are often turnkey, requiring less immediate investment in systems or staffing.
- Industry buyers: Being able to achieve economies and synergies between businesses from the same or complimentary industries could be a good driver for acquisition.
- Diminished Upside: Buyers focused on scaling businesses may find the lack of high-growth potential less appealing.
- Market Saturation: If the business operates in a competitive or declining market, buyers may worry about erosion of market share.
Decline Phase: Challenges and Turnaround Opportunities
Characteristics: In the decline phase, a business faces shrinking revenues, decreased market relevance, or internal challenges such as outdated systems or misaligned leadership.
Pros of Selling in the Decline Phase:
- Attracts Turnaround Experts: Buyers skilled in revitalising struggling businesses may see opportunities to acquire at a discount and reposition the business for growth.
- Asset Value: Businesses in decline often hold valuable assets (e.g., equipment, real estate, or intellectual property) that can appeal to certain buyers.
- Motivated Buyers: Competitors or adjacent industry players may see value in acquiring for synergies or market share.
Cons of Selling in the Decline Phase:
- Diminished Valuation: Declining performance and shrinking revenues often result in lower sale prices.
- Limited Buyer Pool: Fewer buyers are willing to take on the risks associated with a struggling business.
- Intense Due Diligence: Buyers will scrutinise every aspect of the business to understand the causes of the decline, which can complicate the sale process.
Why Buyers Like Declining Businesses:
- Discounted Prices: Lower valuations make declining businesses appealing for opportunistic buyers.
- Turnaround Potential: Buyers with a clear strategy for revitalisation may see significant upside in acquiring a struggling business.
- High Risk: Declining revenues, negative cash flow, or outdated infrastructure can deter risk-averse buyers.
- Reputation Concerns: A tarnished brand or deteriorating relationships with clients and suppliers may be difficult to recover.
- Uncertainty: Buyers not from industry or without industry knowledge may have larger uncertainty around if the decline can be arrested or if it is likely to continue. This uncertainty affects finance, ROI and confidence to proceed.
Timing Is Everything
Selling a business at any stage of its lifecycle requires careful consideration, but the growth, maturity, and decline phases each come with their own unique challenges and opportunities. Buyers’ motivations vary widely depending on the stage:
- Growth-Phase Businesses attract those seeking scalability and future upside but demand a premium price.
- Mature Businesses appeal to risk-averse buyers who value stability and predictability but may lack growth appeal.
- Declining Businesses are opportunities for turnaround experts but require sellers to navigate valuation challenges and buyer hesitancy.
For sellers, understanding the strengths and weaknesses of your business’s stage is key to positioning it effectively in the market. By aligning your sales strategy with buyer expectations and market realities, you can maximise value and ensure a successful transition.
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