5 minute read
Why are they selling? Why good business owners sell strong businesses
By Simon Palmer
One of the first questions that a buyer will ask when a business is for sale is Why are they selling?
When the business is strong and the vendors seem young and healthy, buyers will often show some incredulity and/or suspicion about why it is for sale.
There seems to be a misconception out there that a successful business owner will only ever buy, grow and accumulate businesses. That when they decide to sell one, it could only be if they were retiring, sick or if there was something wrong with the business that the buyer cannot see yet...
This is an incredibly narrow and pessimistic view of what it is to be a successful business owner.
Successful businesspeople sell their businesses for many reasons that have nothing to do with the underlying prospects of the actual business being sold. Any successful business owner should consider selling any business when they realise that one of the following has occurred:
1. If they realise that their time and/or resources is better spent elsewhere
One of the things that makes a person or company successful in business is that they seem to understand the inherent opportunity cost of their time and resources.
Every business owner has limited/finite time and resources and needs to decide where to allocate them. Not every business opportunity operates at the same ratio of time/effort to profit/return. Some businesses are more time hungry and require more effort than others.
When a successful business owner is selling a business, it is often because they could allocate those resources to another business that they already own (that needs more attention or investment) or to another business that they wish to buy.
This doesn’t mean that the business they are selling is not good. The business may be an excellent business, but just isn’t a good fit for their circumstances and their business holdings/portfolio at the time.
2. If they realise that the business is worth more to someone else than it is to them
a. A dental practice that is turning over $700,000 per annum with 0% profit can still be a good job for a dentist who is the owner-operator (taking home 40% of the $700,000 (less lab fees)), but without any profit, it may not be a good business for a third-party owner (who still needs to pay a dentist the 40% of the $700,000 (less labfees) to do the work). That is to say, some practices are worth far more to an owner-operator to run and work in, than to a third-party business owner. b. Some businesses are full of opportunity that the current owner simply lacks the skill, time or inclination to realise. To give an extreme example, a dental practice with a $1 million turnover that is referring out all crown and bridgework or implant cases or simple orthodontics is worth far more to another owner who can offer these treatments, than to its current one.
3. If they realise that they’ve extended beyond their ceiling of complexity
Business owners that become successful often feel they now can replicate the formula with a second location or business, then a third. Many (most) will grow until they hit their ceiling of complexity.
For many, their ceiling of complexity will be their ability and capacity to delegate, manage, hire, inspire and keep good staff. Their initial business did well because it had 100% of the owner’s attention and time. Once they reach their ceiling of complexity, each additional business they own: • Has diminishing returns because the owner’s attention and time will be diluted and there is no one onsite with an ownership mentality; AND/OR • Starts to diminish: n The performance of the original business/es; n Their relationships with their family and friends; or n Their mental health.
If someone is good at juggling and you hand them one more ball than they’re used to, they don’t just drop the extra ball…they drop them all. If the owners in this category cannot raise their ceiling of complexity, they’re better off selling the additional
business, consolidating their holdings to a point they are comfortable with.
4. If they realise that their business would be worth less in the future under their ownership
Abusiness owner’s final years are usually less productive than the years that preceded them. These business owners tend to prioritise lifestyle (as they should) and work less hours per week, weeks per year (and dentist business owners offer lower clinical range).
If a business owner starts to see a decline in the turnover and profit of a business that they own and don’t have a plan or inclination to reinvest time and energy into it, it would make sense to sell now, before the value decreases further. If they want to continue to work, they should do so as an employee/contractor in their old business.
5. If they only bought the business to build it up and sell
There are three main ways to make money out of business ownership:
a. Salary. For a dentist practice owner, this means their 40% commission;
b. Profit. What the business makes after all expenses are paid, including the principal’s salary; and c. Capital growth realisation. Buy low, build up and sell. A good example of this business model is with property developers.
Some practice owners fall into this third category. They have no interest in buying a business and running it for the rest of their careers. They want to buy something cheap, with potential, fix it up, show buyers that the growth is sustainable and sell it for a profit.
About the author
Simon Palmer is the Managing Director of Practice Sale Search, Australia’s largest dental practice brokerage. If you’d like more info on practice sales or want to have a confidential discussion about your practice’s circumstances, email Simon at info@practicesalesearch.com.au or call 1300-282-042.
