At some point in the life of a business, the owner will decide to buy or sell; this is a fact in any fast-paced environment where change is expected and healthy. Buying and/or selling depends on the owner’s goals, business health and market needs, among other considerations. Regardless, all business leaders should prepare for this decision early on.
This option is important because every organism (business) needs to grow and be prepared for how to grow to improve the odds for long term success. Without options for growth there is stagnation and failure. Businesses, like all organisms, have predictable life cycle stages that require timely decisions to ensure prosperity and prevent decline. A healthy business must be prepared early on to expand its market share and increase its capabilities to meet changing market demands. One way to do this is to buy complimentary and/or competitors in the business. For this, the owner needs to know what he/she is buying and how to buy. The operating culture as well as the finances must be strong so that all business members as well as the business Purpose continue to thrive through this transition. Change has both opportunities and threats as two sides of the same coin. Considering both the what and how is crucial for addressing all known and unknown opportunities and threats. Let’s consider some examples.
Buying a business can be faster and cheaper than organic growth yet still requires planning and execution. First, consider your EBITDA, your financial muscle. Look at your balance sheet to determine your debt and if the company can withstand this expenditure. If the answer is yes, then determining what business you will buy and how you will buy is the next step. Is it a business that will take you into a new profitable market where you can apply your expanding capabilities? Is it the purchase of a competitor in your current market? Either can work when there is a team that is flexible and strong, a healthy EBITDA and the muscle to cope with conflict. A company that is aligned by its purpose, executes its mission and is driven by its vision will have a strong team. These strengths will also create options and provide the know how to enhance your capabilities and know where they can be applied.
One of our clients was interested in buying a competitor. Their initial research showed a profitable business with a committed leadership team who appeared to have similar beliefs about profit, people, purpose and planet. Doing a deeper dive with FarVision, we determined their EBITDA (true financial picture) as well as their team’s capabilities. This evaluation produced data that indicated that the bottom line was not accurate, and that the team was not well aligned nor willing to be part of a new entrepreneurial direction. These two weaknesses would have hampered long term success. This extra effort prevented a very costly mistake that may have only surfaced after the sale.
Now let’s consider selling the business. This type of transaction also needs to be carefully planned and well executed, especially if it is a service business. The option of an earn out is very common with a service business. Here a healthy EBITDA and a strong team plays an especially crucial role. The balance sheet makes the business appealing to a buyer and a strong team ensures that there is life after the owner leaves. When an owner leads with a vision that is founded on purpose and run by a mission, the members have a keener sense of how to make the business successful and have a personal commitment to that success regardless of ownership. It is also easier to build a healthy transition when the seller and buyer know who they are talking to and why the business exists beyond simple profit. Values always come into play, so knowing what they are and if they are complimentary will result in less conflict and a healthier transition period.
Another client decided to sell their very successful service business. Working with us, we substantiated their EBITDA and the commitment of their team. The buyer was in a growth mode, financially strong and with an aligned team. All looked good until the seller learned that the buyer expected his involvement for a successful transition and guarantee of income; an earn out. This factor almost killed the deal. We worked with both parties to fairly structure the earn out and the terms of purchase. This resulted in a mutually beneficial conclusion instead of a lost opportunity for both parties.
So, the simple answer to “are you buying or are you selling?” is “always”. How you prepare for this is also simple but not so easy. Here are a few key factors:
- Know your EBITDA
- Create a flexible and strong business culture through Purpose
- Always focus on Profit through Purpose, People and Planet
- Use a road map to navigate the business life cycle stages to stay healthy and prepare for change
- Have a strong leadership team that knows how to work with mutual trust and respect
- Align your long-term goals to a 10-year vision and your short-term goals to a
- Keep a sense of humor
FarVision is committed to win-win results for our clients and all parties in business transactions. We believe that today’s business owners and their members have the best opportunities to create true prosperity and vibrant, economically healthy communities through doing well and doing good work.
Please let us know if we can help you achieve your business goals.