March 03, 2020
M&A - why do sellers sell?
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Most M&A articles, they are written from the perspective of the buyer. In this short article we will take a look at the motivations of the seller in the transaction.
To be effective in our discussions with the seller, it will help to understand their motivations and reasons for the sale.
Retirement and Succession
Two reasons that can go together are the desire for the owner / founder to retire, and the lack of a successor for the business. Retirement does not need to mean that the founders have reached age 65, but simply a stage where they would like to devote less time and energy to the business, while taking out their capital to allow them a comfortable lifestyle. When there are no family members to take over the running of the business, then this scenario becomes much more likely.
Business Adversities and Inability To Compete
In some market segments, access to capital over a long period of time may be required (e.g. Biotech and Pharma, where product research and development cycles are very long). Other markets require capital investment in equipment (such as specialized manufacturing sectors). In these cases, a small company many not be able to compete on its own and may need to be acquired by a large company with access to capital and expertise.
Walmart, famously, made their distribution system into a competitive weapon. The integration of warehousing, logistics and store operations into a single system created a competitive edge that was very hard to replicate.
Similarly, Amazon is renowned for their ability to delivery rapidly, at low cost. They have made their system of distribution, at a low cost, into a competitive weapon.
For companies competing against powerful industry leaders such as these, it may be necesaary to merge with either a competitor or a complementary company, in order to be able to compete.
Eliminate Personal Guarantees
For smaller, family owned, enterprises the founders may have personal property or other assets acting as guarantees for liabilities in the business. In order to eliminate this risk to their personal property, they may decide to sell their business. This would enable them to remove the liability, while potentially freeing up capital with with to invest and build their next venture.
Key Staff or Owner Concerns
Particularly as the business grows, it will face key decisions on direction. Should the organization focus on market segment A or B? Should they they invest in onshore automation or outsourcing? Which opportunity provides the best return with lowest risk? etc etc
These, along with operational decisions, such as company organization and management style, have great potential to cause conflict along the way for the owners. As the business grows and more seats are added to the board, the potential for these conflicts grows. This can lead to a need for one or more owners to leave the business, which in turn can lead to a need to merge.
Related to this is the potential for key staff to leave. This can be because they have been poached by a competitor, or that they also want to try something on their own. For smaller companies this risk is greater - they can struggle to attract the staff they need, and are also reliant on a smaller number of key staff than a larger firm will be.
This is not an exhaustive run through of the potential motivations, but does provide a broad base of considerations when thinking about why Sellers Sell their businesses. As can be seen, they do not all relate to considerations within the business - in fact many are either personal or external factors. Understanding the motivations of 'your' sellers will help you to navigate any discussions that you have in relation to Mergers and Acquisitions.
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