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SIZE MATTERS
Reasons for selling are also determined by a company's relative size. Business dynamics are very different for a $75 million company than for a $3 million one; for one thing, the larger company will have active investors, whereas the small one is likely owned by one person or a family.
Here are some representative examples, organized by business size:
Small Business (up to $10 Million in Revenues)
With companies in this bracket -- many of which are family owned -- the problem is that you hit a plateau. Usually, to grow a company beyond the small-business level requires expansion capital. Do you have the contacts and the know-how to do so? And if you can come up with the bucks, do you have the managerial expertise to run a fast-growing business?
In most cases of small businesses, the founder still has primary control over the company. Maybe the founder is getting close to retirement and wants to cash out. Meanwhile, his kids don't have the skills or inclination to continue managing the company.
By the same token, sometimes a death in the family is the cause for selling. In a small business, everything might hinge on one or two people, so any disruption involving these players means it's the end of the road.
Also, small businesses are inherently vulnerable, and turns of events can rapidly change their outlook for survival. For example, if a slightly larger competitor opens a shop next door and reduces prices substantially, trying to match the other operation's prices could kill your profits. And if a massive chain store drops anchor in your town, your little business could be capsized in a flash.
Let's look at another type of situation. In the high-tech world, there are many examples of small new companies with huge potential. Perhaps you're a gifted young MIT engineer who has come up with an idea to revolutionize cell phones. Even though your company has no customers, it still may be worth many millions because the intellectual property might translate into massive revenues. Though you were able to develop the technology for a mere half million dollars, you will need to raise substantial capital to make the company work. You also must have a top-notch management team. But, as an engineer, this isn't your forte. So you might instead prefer to sell out and move to the next thing.
In short, if you are unable -- or unwilling -- to find ways to take your company beyond a small business, it is definitely a good idea to look at the possibility of selling it.
Medium-Size Business
($10 Million to $100 Million in Sales)
It's a whole different ball game at this level. Business matters are far trickier and more complex than at a small company. And there's a lot more at stake, financially; if you make a mistake, it could cost you $50 million. You can find yourself in bankruptcy right quick if you don't watch it. Not many owners have the skills to run a growth company. That's why so many business failures occur when a medium company tries to grow into a large one.
Also, you're more of a target than a small company. So when the big player in your industry sends you a threat, you pay attention.
Quite a few companies in this bracket are still family owned. And once the business has grown to this level, the pie gets a lot bigger, so greed takes over. Family members or partners start to disagree over important issues -- company "vision" or marketing strategies, for example. Or some family members have become disgruntled, sometimes because of a divorce, and they want to cash out -- despite the fact the company has great prospects.
There also can be terrific opportunities. In this size bracket, valuations can fluctuate widely. Much depends on prevalent conditions in your particular sector. If your company is in a mature industry that grows 5% per year, do not expect a high valuation. But if your industry is red hot, the valuation can be substantial.
But even if the company is in an industry that is strong, this does not mean the company will continue to be a success. Many medium-size businesses fail. You must continually take a hard look at the competitive environment. Is the product line strong? Where will the growth come from? Can management get the company over $100 million in sales and even beyond $1 billion? Will there be a need for a substantial investment in R&D? If so, where will the money come from?
Any of these factors or questions can be the basis for a decision to sell.
Big Company
(over $100 Million in Sales)
Very few companies achieve such "big time" status. But as is the case with any stage of the life cycle of a business, there are many potential dangers. A few wrong steps, and a big company can go into freefall.
One of the most pressing issues is whether the company has enough growth potential to become public. Or does it make more sense to merge into another, bigger company since the market is really a niche?
At this level, the dynamics involve a complicated matrix of interests: Investors often play a huge role in the sale or stay decision.
