When is the right time to sell a business to avoid losing money and sleep
Originally published on: Forbes.cz
They have built up their businesses from nothing and achieved billions in sales, but as owners they start to think about selling their companies only when they get into trouble. And that is wrong, say the experts.
It is not very common in the Czech Republic to sell a business already when it is in the growth phase. Nonetheless, this very phase is the most advantageous for the owner. Abroad, it is quite common for family businesses to sell part of their shares to an investor but continue to manage and own the business. Czechs are far more conservative in this regard.
“The owners usually hold a business like family jewels and don’t want to admit to the possibility of providing a share to a third party, even though this oftentimes would have a positive effect on the business. Their feeling is that this would turn the family business into a ‘corporation’ straight away. This is an incorrect interpretation, however,” says Jiří Kroc who is a director of investment projects at Jet Investment.
According to him, owners start to think about selling their business late, usually only at retirement age. “To sell a business takes some time, of course, not to mention that you may be selling in a time of crisis. The best business sales stories are the ones where the owner started to think about selling ten years earlier than is the standard. This gives him or her the comfort to sell at a time when the business is at its peak and, most importantly, it’s not necessary to deal with any kind of pressure, which is always undesirable in such case,“ explains Kroc.
The most common reason why Czech business owners dispose of their businesses is that they have nobody to turn it over to. They achieved billions in sales but forgot or had no opportunity to develop successors. “The style of management when a business is run by one owner is certainly fine. Until a certain level of complexity is reached, a business managed in this way does not feel the need for change. It has a good product, great relationships with customers, and it is not held back by a corporate structure or bureaucracy. From a certain point, though, it’s not possible to grow further and the company hits its limits. As soon as the business operates multiple branches across Europe or the world and is opening new ones, then the individual cannot keep up with the size of the company and starts to slow the business down,” Kroc adds.
Jet Investment specializes in purchasing businesses where it helps with financing and managing further growth, or it buys businesses in trouble. Then it will get such a business back on its feet and sell it on after reaching the finish line. “We always try to move the business from point A to point B, whether that means strengthening its market position or leading it out of financial troubles. We’ve done this already with 28 businesses,” adds Jet Investment partner Marek Malík. Jet Investment is involved in the management of a company, where it ordinarily holds a majority, usually for seven years.
According to Malík, getting a business out of financial trouble is easiest if significant structural obstacles are not to blame. In such a case, it is “enough” to put money into it. “The problem with most businesses we rescued from insolvency between 2010 and 2013 was not the product or the market but poorly managed expansion in combination with lower economic performance after the crisis. If expansion of these firms had been managed sensitively, they never would have gone into insolvency.”
Repositioning of a business that needs, for example, to focus on supporting a new product or customer in a new market is far more complex. “We look for companies that have a good and competitive product but have reached their peak within the domestic market, for example. For such companies, we are the ideal choice. We help them to enter new markets, increase sales and profitability while giving the owners peace of mind,” explains Marek Malík.
Estimating price is the easiest thing
A number of variables determine the selling price of a company, says Malík. The standard technique used for valuation of a businesses is the discounted cash flow method. “The math is actually the simplest thing about the whole transaction. Any college student can calculate the value of a business. But that’s not the point. Both, the buyer and the seller must especially have a vision, a well-considered estimate of the future. After the purchase, the key is to manage changes in the company in a professional manner in order to realize this strategy. The most hectic period is the purchase and sale of a business, but the hardest work is its management,” Malík relates.
Jet Investment avoids investments into start-ups, but within industry it deals with a wide range of segments. It worked with companies like Vinium, Sběrné suroviny, Moravské autoopravny, Českomoravský len, Less & Timber and Kordárna Plus, all businesses with different focuses. The managers of the firm today see opportunities in a number of fields, including, among others, railways, products for energy production with minimal environmental impacts, modern composite materials, and the electrotechnical industry. They see investment opportunities also in fields related to ecology.