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The Seller's Perspective: Dreams and Realities

Welcome to the second installment of my "Seller vs. Buyer" blog series, where I delve into the contrasting perspectives of sellers and buyers in the world of small business acquisitions. In the previous post, I discussed the fundamental differences in goals and approaches between sellers, who dream of an outright sale and immediate financial freedom, and buyers, who seek to spread the cost of the purchase over time while mitigating risk.


As an investor, I encounter numerous small business owners seeking to sell their business. Many enter the process with high expectations, not only in terms of what they hope to receive but also around the simplicity of the process, and timing of when it will occur. Unfortunately, the reality is that selling a business can be a complex and challenging process and often does not meet these expectations.


In this post, I will explore some of the motivations, dreams, and common challenges faced by sellers during the sale process and provide some thoughts on what owners can do to prepare themselves for what is involved.


The Dream: Immediate Financial Freedom


For many business owners, the prospect of selling their business is a ticket to a new chapter in life. Whether it's the next big adventure, a vision of driving off into the sunset in a new luxury car, traveling the world, or simply enjoying a comfortable retirement, the dream of an immediate and substantial financial windfall is highly appealing.


  • Financial Independence: Sellers often envision achieving a level of financial independence that allows them to pursue a new exciting business venture, their personal passions and leisure without financial stress.

  • Luxury Purchases: The idea of acquiring high-end assets like a new yacht, a car, or a dream holiday home can be a strong motivator for wanting an outright sale.

  • Simplifying Life: After years of managing a business, many sellers look forward to a simpler, more relaxed lifestyle without the pressures of daily operations and management responsibilities.


The Expectation: Once the Decision is Made

Once a decision has been made to sell, an expectation is generally created in the seller's mind regarding the value they will receive from the sale. This expectation can be influenced by various factors, including the seller's emotional attachment to the business and external reinforcement from advisors, such as their accountant or lawyers, friends, or even market trends. These expectations can be hard to let go of, as often the seller has already spent the money, at least in their own mind. They may also have advertised their expectations to their spouses, friends or family members, and this makes it difficult to then lower them.


  • Emotional Valuation: Sellers may have an inflated sense of the business's worth due to their personal investment of time, effort, and passion.

  • External Influences: Advisors, friends, or market conditions can reinforce these high expectations, making it challenging for sellers to accept lower offers.

  • Comparative Example: Similar to selling one's home, where owners often overvalue their property due to personal attachment and memories, business owners can struggle to view their business objectively. Just as real estate agents need to manage homeowners' expectations, advisors play a crucial role in helping sellers understand the market value of their business and to remove the emotion from the process.


The Reality: Common Challenges in Selling a Business

While the dream of an outright sale is enticing, the reality can be quite different. The process of selling a business involves numerous complexities and challenges that sellers must navigate. These can include:


  • Valuation Discrepancies: One of the first hurdles is often a discrepancy between the seller's valuation of the business and what potential buyers are willing to pay. Sellers might have an emotional attachment to their business that inflates their expectations.

  • Negotiation Difficulties: Negotiating the terms of the sale can be challenging, especially when buyers prefer structures like earn-outs or deferred payments, which can conflict with the seller's desire for an immediate payout.

  • Due Diligence: The due diligence process can be rigorous and invasive, requiring the seller to provide detailed financial, operational, and legal documentation. This process can be time-consuming and stressful.

  • Finding the Right Buyer: Identifying a buyer who not only has the financial capability but also aligns with the seller's vision for the future of the business can be difficult.

  • Emotional Attachment: Letting go of a business that one has built from the ground up can be emotionally challenging. Sellers may experience a sense of loss and identity crisis post-sale.

  • Staying Involved: Where a deferred payment or earn out structure is negotiated, it can also be hard for a business owner to stay involved in the business post-sale without having the full control they are used to. Adjusting to a new role, often with reduced authority, can be frustrating and challenging.


Case Studies: Success and Struggles

To illustrate the seller's perspective, let's look at a couple of case studies.

Case Study: A Successful Sale

  • Background: Jane owned a thriving local bakery for 20 years. Profits were stable and consistent, and Jane had implemented processes such that the business could be run almost fully under management. When she decided to sell, she aimed for a full upfront payment to retire comfortably.

  • Challenge: Whilst buyers recognised that Jane had a great business, the initial offers were much lower than expected based on a full upfront payment, and many buyers proposed earn-out structures as an alternative with a higher valuation.

  • Outcome: After months of negotiation, Jane found a buyer willing to meet her price with a partial upfront payment and a shorter earn-out period. The transition period ensured the bakery's continued success, and Jane retired comfortably.

Case Study: A Challenging Sale

  • Background: John ran a small tech startup for 10 years. He hoped to sell quickly and start a new venture.

  • Challenge: Buyers were interested in John’s business as he had a good client base and stable revenues, but also recognised that John was key to the businesses continued success and profitability. As such Buyers would only consider offering terms involving deferred payments and retaining John as a consultant for several years.

  • Outcome: John struggled to find a buyer who met his desired terms. Eventually, he accepted an offer with a significant earn-out component. The sale took longer than he anticipated, and John was retained in the business over the duration of the earnout and assisted with the eventual transition. Whilst not ideal, John received the value that he wanted for the business and ensured the business's stability and profitability.

Conclusion: Balancing Dreams and Realities

For small business sellers, the journey to a successful sale is often a balance between dreams and realities. Understanding the common challenges and preparing for them can help navigate the process more effectively.


Preparation, clear communication, realistic expectations, and a willingness to negotiate can make a huge difference between a smooth transition and a difficult sale. By acknowledging and addressing these realities, sellers can better position themselves for a successful and rewarding exit from their businesses.


Whilst not easy, Sellers also need to try to remove emotion from their assessment of their business and its value. This is far from easy, particularly when you have poured years of sweat and tears into it. I liken it to a child growing up and leaving home, its hard to let go. However, the reality is that any buyer will not have the same emotional connection, and their decisions will be purely commercial.


Standing back, and adopting a similar mindset, will greatly assist in finding a balance that satisfies both your dreams and the buyer’s needs, ensuring a smooth and mutually beneficial transaction.



 
 
 

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