Motivations to Buy a Business

Jul 17, 2018

One of my favorite summer songs is “Centerfield” by John Fogerty.  The chorus of the song has the lyrics “Put me in coach, I am ready to play today.  Put me in coach, I am ready to play today”.  The song is about baseball, but its theme could equally be about business.  I have long considered business to be the ultimate competitive sport.  Winners & losers are determined annually in the business world internationally, domestically, and locally based on the strength of a company’s executive leadership, marketing strategy, products, customer service, financial acumen, and employees.  In the world of publicly traded companies, winners & losers are documented with appreciation or depreciation in stock value and the size of dividends paid to shareholders.    In the world of privately held companies, winners & losers are documented with profits to ownership and the sale price of businesses in the mergers & acquisitions marketplace.

As the Pacific Northwest’s oldest business brokerage firm and the premier venue in our region to acquire a business in the “middle market”, IBA professionals interact with 1000’s of parties interested in acquiring privately held companies and family businesses annually.   It has been our experience that the parties interested in purchasing a business are generally motivated by one or more of the following three desires:

Economics – The most common motivation to purchase a business is financial return.  Owning a business has three primary economic benefits. The first benefit is the opportunity to earn more money than a person is able to earn working for someone else.  A basic principle of successful business operation is that the employer generates more money off the production of their employees than they spend on salaries and wages.  The owner of a successful business should be compensated at a “fair market” value for their labor contribution to the business and also receive a dividend in the form of profit distributions for being an owner.   The second benefit is the opportunity to build equity value in a business.  Unlike a job which cannot be sold in the marketplace, an entrepreneur has the opportunity to sell their business and harvest the product of their business acumen and hard work in a transaction.  It is my recommendation to all individuals selling privately held companies and family businesses that they do not solely judge their financial success as an entrepreneur by the amount they receive for their business at time of sale, but evaluate their financial success by totaling the amounts they received annually while owning the business with the sale value of the business after subtracting the amount they invested. This analysis is similar to the analysis an investor would make for a publicly traded stock purchase by assessing the sale price and the dividends received while the stock was owned minus the acquisition cost of the stock.  The final economic advantage of owning a business is the ability to shelter or redirect income for tax and investment benefit.  Examples of being able to shelter income for tax benefit include being able to pay for vehicles, insurance, cell phones, etc. with before tax dollars.  An example of being able to redirect income for investment benefit is paying rent for occupancy of personally owned real estate as a return on investment or to gain equity and/or facilitate appreciation of another asset.

Leadership – The second most common motivation for buying a business is a desire to lead and test business acumen in the ultimate competitive sport, business.  Many of the participants in IBA’s buyer database program are corporately employed individuals who desire the opportunity to take the helm of the ship and steer its direction.  IBA has sold privately held companies to individuals that have held high level executive positions at Microsoft, Boeing, Nike, Starbucks, ConAgra, Paccar, and a spectrum of other companies.  Each of these individuals told stories of frustration about not being able to make command decisions without having to get approval from upper management or the board of directors.  The acquisition of a business allowed them to fill the top position on the corporate pyramid in a privately held company.

Control – The final common motivation for buying a business is a desire to obtain increased control of one’s life.  Many individuals desire to create a life that has an appropriate balance of work, family, friends, and personal activities.   Entrepreneurship facilitates gaining control of one’s schedule whether the desire is to coach little league baseball, serve on non-profit boards, or being able to take vacations or personal days without having to ask for permission.  Entrepreneurship also facilitates the ability to build a corporate culture and staff in alignment with personal positions & objectives.  For example, IBA has sold companies where members of the LGBT community created a work environment friendly to all sexual orientations and eco-friendly entrepreneurs emphasized “green” practices in their companies to do their part to make the world a better place for future generations.  No matter the element of your professional life you wish to control, entrepreneurship creates an opportunity to do it “Your Way”.

If you are interested in buying a business in the “middle market” in the Pacific Northwest to achieve economic, leadership, or control goals, the professionals at IBA would welcome the opportunity to learn what you are looking for in an acquisition and add you to our buyer database program, so you get an opportunity to evaluate the quality businesses IBA represents for sale when they first enter the market. 20 -25% of the businesses IBA sells annually sell to participants in our buyer database program.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.