by Dave Driscoll
Entrepreneurs are a unique breed who thrive on a relatively high level of risk. They may or may not be thrill-seekers in other aspects of life, but entrepreneurs do have more tolerance for risk in their careers than the average Joe or Joanne.
The best entrepreneurs know how to balance their risk tolerance with data and information analysis to make wise decisions. Long-term goals are reached through comprehensive strategies with the flexibility to take advantage of changing situations. Key to this is entrepreneurs’ ability to be comfortable with a healthy dose of uncertainty.
Risk tolerance should not be mistaken for carelessness; solid information is needed for an entrepreneur to take risks wisely.
Before seriously considering any acquisition, buyers absolutely should analyze:
- historical financial performance.
- prospects for growth.
- leadership team/employee strengths.
- industry trends.
- systems and processes to ensure consistency.
Initial information in these categories will be provided by the seller and be shared with a potential buyer (via the business broker) after execution of a Confidentiality Agreement and demonstration of the ability to fund an acquisition. Conversations with the broker and eventually the owner will offer further insight. If the discussion progresses to a Letter of Intent (LOI), the due diligence period allows for more in-depth assessment of the company’s operational strengths and weaknesses.
Of course, there are no guarantees in business ownership, but prospective owners need to confidently make informed decisions. Weighing the risks against the elements predicting continued success and growth, buyers should be able to logically decide whether a company matches their goals and skill set. Realistically, this is only the first of MANY important decisions any owner will face regularly.
However, as a business broker, I frequently encounter individuals who have analysis paralysis. This is most common in prospective buyers contemplating their first business. Despite analyzing the appropriate financial statements, learning the organizational structure, confirming the business is not dependent on the current owner, considering the realities of the industry, and establishing good chemistry with the outgoing owner, some people simply cannot reach a clear decision to proceed or walk away.
Obviously, prospective buyers afflicted with analysis paralysis are a distraction for sellers. Much time can be wasted generating granular reports, answering inconsequential questions, and offering reassurances, only to find that the “buyer” was never a serious contender.
But sellers are not immune to their own analysis paralysis. Frequently business owners ignore the internal or external voices reminding them to begin preparing to sell their businesses. Selling a business has emotional implications for the owner’s professional and personal life. In an unconscious effort to avoid the inevitable, many owners engage in a search for the mythical “perfect time” to sell the business. Hypothetical conversations with family and/or advisors may lead to looking at industry trends, economic predictions, and seeking a crystal ball. Many owners become stuck in that cycle of analysis, looking for certainty that doesn’t exist. Sellers’ analysis paralysis can also take the form of being hyper-critical of each prospective buyer or insisting on an unrealistic selling price or terms. The real consideration should be whether the value and likely sale price of the business would support the owner’s desired life after business.™ Sadly, the business suffers if the owner holds on too long and doesn’t have the energy and enthusiasm to grow. Just as buyers need to be decisive about purchasing a business, owners need to decisively acknowledge the time to sell before burn-out sets in and the business stagnates.
To be blunt, if you are risk-adverse and can’t handle some uncertainty, you shouldn’t be a business owner. The ability to take calculated risks and pivot as needed is essential to grow - and eventually exit from - a successful business.
Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.