What is Your 'Why' in Seeking a Transaction for Growth or Exit?

David H. Crean, managing director for Objective Capital Partners, discusses the fundamental reasons for understanding the 'why' for entrepreneurs and business owners in seeking transactions for either growth or exit.

Know Your Why

Recently, I met with a life science entrepreneur and business owner who "wanted" to do a deal but could not clearly explain the why. It was as if the owner is a deal junkie and wanted to do a deal for deal's sake. As a matter of principle, know why you want to do a transaction – whether it’s to raise growth capital, recapitalize and provide liquidity to current shareholders or sell your business entirely. Know your motivations and be able to articulate them succinctly. Your why or purpose will become the ultimate differentiator in your business and with the investment community. One would think that knowing your why and communicating it clearly should be natural and easy to do. However, often times, I speak with business owners who cannot clearly define their why in an authentic manner.

Exceptional companies are good at aligning their purpose or why with their execution, and as a result, enjoy category leadership. To quote Simon Sinek, "People don't buy what you do or how you do it, they buy why you do it." It's no different in pursuing transactions for either growth or exit. Your why should permeate and drive your behaviors. Let's explore the common reasons for growth and exit.

Growth

To be successful and remain in business, both profitability and growth are necessary and important for a company to survive and remain attractive to investors. Profitability is, of course, critical to a company's existence, but growth is crucial to long-term survival. Growth makes it easier to acquire assets, attract new talent and fund investments. It also drives business performance and profit.

Growth can be good for business for many different reasons including taking advantage of new opportunities, expanding your products or services, attracting more customers, increasing sales traction and employing more staff.

Growth may also help you to respond to market demand, allowing you to increase your market share and capitalize on your growing brand. Growth often spurs innovation, helping you to differentiate in the market and fight off competition. Growth can also boost your business' credibility, allow you to broaden your supply base and increase stability and profits. However, to be successful and sustainable, growth has to be strategic and has to happen for the right reasons. If you are raising growth capital, know how much you want to raise, whom you need to reach out to, what the uses of capital will be and how it will grow your business and value when deployed in a capitally efficient manner.

Reasons for business growth

Most businesses grow to become bigger, perhaps through increased sales or market share, but the size isn't the only driver. Many other benefits could motivate business owners to grow including:

• greater sustainability or resilience in the market
• lower costs - due to economies of scale
• greater market dominance
• greater buying and bargaining power
• ability to mitigate commercial risks through diversification
• ability to reduce the threat of competition
• ability to survive market fluctuations and downturns
• ability to attract the best talent and staff

Growth may not be feasible or practical for all businesses but, in most cases, stagnating is likely to lead to missed opportunities or death of a business.

Business growth strategies

There are many ways to grow a business. Which way you choose to expand largely depends on your why, ambitions, and the opportunities and resources available. However, two crucial factors for choosing a business growth strategy exist. They are:

• products - what you offer today, and what you'd like to offer in the future
• markets - where you sell today, and where you'd like to sell in the future

Based on these factors, several main types of business growth strategies include market penetration, product development, market development, diversification, acquisitions, franchising, strategic partnerships, and improving efficiency in your current business. You may also want to construct your own unique combination of these strategies. The best approach will usually be the one that suits your overall strategic plans. Keep in mind that, to succeed, your growth strategy has to be deliberate.

Exiting Your Business Through a Partial or Full Sale

If you want to provide liquidity to current shareholders, it helps to know why this route is preferred and the percentage of the company you plan to sell. Why do you want to bring it a minority or, more likely, a majority owner? If you are selling the entire business, you must be able to succinctly answer the questions – why are you selling your business? Why now? An advisor can help you formulate answers to these questions. Know that if you are selling the business entirely you will likely be asked to stay on for a period of time, typically one to two years. It’s a big “red flag” if you say anything that indicates you might want to “cut and run” from the business. Buyers always drill down on why entrepreneurs want to sell their businesses now.

There will come a time when business owners will need to sell their companies. The right time to sell a business is based on various reasons, such as economic conditions, industry trends, personal situations, and professional considerations. Some common reasons why business owners choose to sell out now or know when to sell a business include:

You Don’t Have the Energy, Skills, or Resources to Grow the Business

A business should continually grow, and as business owners, there will come a time when you’ll feel you can’t do it anymore. This is the right time to sell your business and entrust it to those who have the skills and resources to take it further.

You Need More Time for Your Personal Life

At some point, as a business owner, you will finally realize that running a business takes too much of your time. When the time comes that you will need more time for your family and/or your personal life, then selling your business is a good way to do it. You can use the funds from your sale to start a side-hustle business or franchise that requires less of your time and effort.

You Experience Lack of Alignment

If you got into a business for the wrong reasons, you will eventually experience a certain level of exhaustion and burnout that will no longer be healthy for you physically, emotionally, and mentally. If you think that there is no quick fix for the burnout you feel, then it’s time to sell out and move on.

Your Personal Interests Change

If you suddenly realize that, after years of running and growing your business, it doesn’t feel as interesting and exciting as when you started it, then it means you’re losing your passion in your business. This is a good sign that you should consider selling it. Over time, it’s normal for your line of interests to change. So it’s best to sell your business to those who will be interested to take over what you’ve started.

You Want to Have a Fresh Start

Entrepreneurs have other motivations to sell their business and one of these is the desire to start a new one. Some entrepreneurs go into business because they want to start and build something bold and take a risk. This is what drives their spirit. If a business has already reached a certain point of growth and stability, some entrepreneurs just want to move forward, sell the business to cash out their hard work, and start something new and exciting.

A Sudden Lifestyle Change Affects Your Business

Business owners need to understand that there should be a clear delineation between their personal lives and their business. If a sudden lifestyle change (like getting married, going back to school, or giving birth) becomes in conflict with your commitment to your business, then it’s time to consider selling it out and find another way to earn.

You Have Health Issues

If you think your business has cost you your health, then it’s time to seriously consider selling it. Facing serious health issues is one of the common reasons why some business owners choose to sell their business. After all, it’s best to prioritize your health, so taking time off to restore it will help you become more productive later on should you decide to start another business again.

You Want to Retire

The majority of entrepreneurs plan to sell their business as an exit strategy to provide a comfortable retirement. Most local business owners plan to sell their business rather than keep it in the family or hire someone to run it in their place when they retire. The driving force for this stems from the hand-to-mouth lifestyle many entrepreneurs face and lack of savings for retirement.

Your Business’ Value Has Improved Significantly

When your business has grown substantially, it might be time to consider selling it. Running a business is risky, and the bigger you get, the bigger the risks you have to face. The value of your business is not liquid until you go through the transaction of selling your company.

Your Business Has Substantial Sales Growth

One reason entrepreneurs choose to sell their business is that it has had substantial growth. This is appealing to buyers and you can get a great deal from the sale. Some business owners just want to take a lump sum of money from the sale, and the best time to do this is when you can show substantial and consistent sales growth and earnings.

Opportunity Costs - You Need Cash for Another Business Opportunity

Some small business owners opt to sell their business because they need cash to start an even bigger small business. If you have plans to start another business that you think will earn more income than your current one, but you don’t have the money for a loan down payment, then it’s better to just sell your current business for the new one as long as you believe that it will be worth it.

Your Business Doesn’t Have the Capital to Survive

Usually, small businesses are highly illiquid and risky assets. Without adequate capital, you can’t realize the full potential of your business. If you need more liquidity and are presented with the possibility of selling your business, you may want to consider this opportunity. This can be more advantageous if the value of your business is already high.

Your Overall Exit Strategy Is to Sell Your Business

There are business owners who invest in building a thriving business to eventually sell later on for a huge sum of money. If this is your purpose for starting the business in the first place, then it’s a great reason to sell the business as soon as you have reached your desired growth. After all, there are many startups that earn a great amount of money for selling their prototypes.

You’ve Achieved Long-Term Financial Security

One good reason to sell your business is if you have achieved a certain level of financial security from running the business and you want to step down and start a more laid-back lifestyle. You don’t need to fully retire to do this. Perhaps you just want to start a less demanding business or just own a franchise that doesn’t require much of your time.

You Receive an Offer Too Good to Turn Down

If a buyer presents you with an offer you can’t refuse, it’s a good enough reason to accept and sell your business. Such an offer is usually priced way above the market value of your business. This kind of offer is rare, so you wouldn’t want to pass it up because you may not get another one like it the future.

You’ve Become More Risk-Averse

Risk is essential to your business’ continued growth. If, through the years, you have become risk-averse, and you get to the point that new opportunities invoke more fear than excitement, it is a sign that you should call it quits with your business. Becoming too conservative means losing your drive to grow the business, and this is a good reason to sell it out.

Your Business Partner Wants to Sell

If your business partner wants to call it quits and move on, you have the option to either buy out his shares and own the business entirely, or just sell the business to a third-party and start anew. Most of the time, the second option is more prudent because you will have an equal, prorated share from the sale.

Your Business Industry if Thriving

If your business’ industry is thriving, it’s a good time to sell your business and move on to your next project. A business in a thriving industry will likely sell more than if your business’ industry is struggling. You can take this opportunity to liquidate your business while there are more customers interested in buying it at a good price. It’s important to pay attention to industry trends, as it will benefit you when you decide to sell.

You Struggle with Poor Business Performance

Running a struggling business can be very stressful and demotivating. If you notice that your business’ performance doesn’t improve even after you have exerted a lot of effort and invested many resources to lift it up, then perhaps it’s time to consider selling it to someone who has the skills and money to revive and grow it. Just don’t expect to get much from the sale.

Market Headwinds

When the market trend is clearly moving against your business, it is a sign that it’s time to sell out. In today’s fast-growing technological society, it’s possible for nearly all businesses to have the market bottom out on them. It’s essential that they must be on the lookout and prepared for a sale before their business becomes totally worthless.

Final Thoughts

Once you understand your why, you’ll be able to clearly articulate and better understand what drives your behavior. When you can do that, you’ll have a strong point of reference for everything you do going forward. You’ll be able to make more intentional choices for your business, and frankly, in your career and life. You’ll be able to inspire others to join your cause in a purposely manner.

If you are looking to either explore opportunities for growth or a sale of your company, our firm is happy to assist you flush out your why and implications for the business. Contact me at (858) 461-9490 or reply directly to [email protected].

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Disclosure

Objective Capital Partners is a leading investment banking advisory firm whose Principals have collectively engaged in more than 500 successful transactions serving the transaction needs of growth stage and mid-size companies. The executive team has a unique combination of investment banking, private equity, and business ownership experience that enables Objective Capital Partners to provide large enterprise caliber investment banking services to companies with annual revenues up to $500MM. Services include sale transactions, partnering/ licensing, equity and debt capital raises, valuation and comprehensive advisory services. The firm uses a proprietary process to work to achieve maximum company valuation, premium pricing, and high client satisfaction rates post-sale. The firm’s industry expertise is focused on 5 verticals including healthcare, life sciences, business services, technology, and consumer products. Additional information on Objective Capital Partners is available at www.objectivecp.com.

This article is provided for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. Objective Capital Partners and BA Securities are separate and unaffiliated entities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC makes no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.