“What happens when an entrepreneur is approached out of the blue to sell their business – especially when times are tough?”
Given today’s operating environment, it is becoming increasingly common. High interest rates, slower economic growth and tighter access to capital have created opportunities for well-funded businesses and investors to acquire companies that may be under pressure. At the same time, many owners are asking themselves whether they should continue investing time and money into rebuilding their business or accept an offer while one is on the table.
There is no universal answer. Every business, industry and owner is different. However, there are a few important considerations before making what is likely to be one of the biggest financial decisions of your life.
Not everyone is a serial entrepreneur
The term “serial entrepreneur” has become something of a buzzword. While there are certainly individuals who have successfully built, sold and started multiple businesses, they are the exception rather than the rule.
For most founders, they will build one significant business during their lifetime. It is often the product of years, if not decades, of sacrifice, calculated risk and relentless hard work. More often than not, it also represents the largest asset they will ever own.
That is worth remembering before rushing into an acquisition offer simply because it arrives at a difficult point in the economic cycle.
Before deciding to sell, ask yourself whether you are exiting because it is strategically the right time, or because current circumstances have temporarily reduced your confidence.
Those are two very different decisions.
Ask yourself what the buyer sees
Acquirers are rarely driven by emotion.
If they are interested in buying your business, it is because they believe they can generate a return on that investment.
Sometimes the opportunity is obvious. They may be looking to expand their market share, strengthen distribution channels or integrate vertically or horizontally into an existing supply chain.
Sometimes the value is less visible.
Perhaps they have identified future regulatory changes that will benefit the sector. Perhaps they see consolidation taking place within the industry. They may have access to capital, technology or operational expertise that allows them to unlock value that would be difficult for the current owner to realise alone.
One of the most valuable questions an entrepreneur can ask is:
“What does the buyer believe this business will be worth in three to five years’ time?”
If they are prepared to invest significant capital today, there is usually a reason.
Understanding that reason does not necessarily mean you should reject the offer. It simply helps you negotiate from a far stronger position.
Value and price are not the same thing
One of the biggest misconceptions in any business sale is that the highest offer automatically represents the best outcome.
Price is only one part of the equation.
Deal structure matters just as much.
Is the purchase price paid upfront, or is part of it linked to future performance through an earn-out? Are there warranties or indemnities that could expose you long after the transaction closes? Is working capital included? What assumptions have been made about future performance?
These details can materially change what ultimately ends up in your bank account.
Entrepreneurs understandably focus on the headline number. Experienced advisors tend to focus on everything written in the pages that follow.
Are you ready to stop being the boss?
One of the biggest adjustments after selling a business has very little to do with money.
In many acquisitions, founders are expected to remain involved for anywhere between one and four years. The reasoning is simple. Customers, suppliers and employees often have confidence in the founder, and buyers want continuity while the transition takes place.
The challenge is that life changes overnight.
You are no longer making the final decisions. Instead, you report to new shareholders, executives or a board.
For entrepreneurs who have spent years building a business on their own terms, this can be an incredibly difficult adjustment.
We worked with one founder who ultimately forfeited close to half of the value attached to his sale because he simply could not adapt to becoming an employee after spending his entire career as the owner.
The commercial transaction made sense.
The personal transition did not.
Before signing an agreement, it is worth asking whether you are genuinely ready for that change.
Don’t underestimate the tax consequences
One of the most common areas where entrepreneurs are caught off guard is tax.
Business owners often assume tax only becomes relevant once the money lands in their account.
That is not always the case.
Depending on how a transaction is structured, there can be significant tax implications well before all of the proceeds have been received. Deferred payments, earn-outs and share-based consideration all need careful planning.
The difference between a well-structured transaction and a poorly structured one can amount to millions of rand.
This is why an experienced advisory team brings value beyond valuations and legal documentation. They help structure the transaction so that commercial, legal and tax considerations work together, rather than against one another.
Be cautious of “success fee only” advisors
Professional transaction advisors – including ourselves – often charge upfront fees alongside a success fee.
That can initially seem expensive.
It is also why entrepreneurs are sometimes tempted by individuals who offer to negotiate the transaction entirely on risk.
On the surface, it sounds attractive but it is worth asking whether that advisor has the experience, resources and staying power to manage what is often a lengthy and highly complex process.
A quality transaction can easily take 12 to 18 months to complete.
Negotiations stall. Due diligence uncovers issues. Funding structures change. Buyers renegotiate. Regulatory approvals can take longer than expected.
An advisor motivated solely by closing a transaction may become focused on getting any deal across the line, rather than ensuring it remains the right deal for the business owner.
Experience matters because good advisors know when to push, when to compromise and, just as importantly, when to walk away.
The right decision is not always the obvious one
Selling a business is about far more than accepting an attractive offer.
It is about understanding what your business is truly worth, what future value may still exist, how the transaction has been structured, what life will look like after the sale and whether the timing genuinely aligns with your long-term goals.
Sometimes selling is absolutely the right decision.
Sometimes investing another two or three years into improving profitability, strengthening governance or reducing key-person dependency can materially increase the value of the business before going to market.
There is no formula that applies to every entrepreneur.
If you are in the process of selling your business and are trying to navigate some of these issues and would like a sounding board, please do not hesitate to reach out to us. We have an experienced team of CFOs who have walked this journey with entrepreneurs across a variety of different industries and can add enormous value to you in this process.
Authored by Rowan De Klerk, CEO & Founder of The CFO Centre South Africa. This article is from his monthly newsletter for forward-focused business leaders. Subscribe to Financial Edge to access future editions.