Out of the Box

To Sell or Not to Sell

By Menachem Lubinsky on November 09 2007

There are many reasons why businesses are sold. The most common are retirement, cashing out, or trading in for a better opportunity. Businesses sometimes are at an impasse, particularly when an infusion of capital is necessary to either keep the business going or to take it to the next level. As a business consultant, I periodically stumble upon companies that are rife for a sale simply because they appear not to be capable of moving the business forward.

A family-owned snack food company has been doing approximately $5 million in sales for the past 6 years. Founded in the 1950’s, the company was now managed by Sol, a grandson of the original founder. In addition to his own family, Sol had to send monthly checks to his aging parents and to a sister living on the West Coast. Miraculously, Sol’s company has been selling some of the same wholesalers and brokers for almost a half century. He was struggling to modernize the plant, invest in new packaging, develop new healthy snacks, and pay for the expenses of two commissioned salesmen. In his gut, Sol also knew that his sales have been flat for so long, simply because he has done little to market his product. “I’m really choking and marketing is the last thing that I can afford,” he says.

Sol’s choices were to take in a partner, seek equity financing if he does not mind giving up a piece of his business, or put the company up for sale. When I shopped the business around for him, I realized that the company could be a good fit for a merger or perhaps to an entrepreneur who appreciated the track record of the company, with the exception of profits. The successful buyer was able to put in nearly $1.5 million into the company, most of it into marketing and increase sales three-fold in little under 18 months.

Sol later had seller’s regrets and thought that he might have been better off if he did seek out equity financing. He thought that taking a loan from the banks was not an option, since they surely would not lend money to a company with flat sales. Many businesses, both larger and smaller than Sol’s, face the same dilemma albeit that their outcomes are different.

Many business people worry that even if they managed to raise the money and invest in marketing, failure might put them in a worse position. The risk factor is not to be taken lightly, although a good strategic marketing plan should work, given that the product lives up to market expectations. Sol desperately needed new packaging, trade ads, and an aggressive plan to position his new healthy snacks.

It is fascinating to observe that people often make business decisions for the wrong reasons. I have seen people that worry about how they will be perceived if they sell or merge. Others have a strong emotional attachment or feel that they are the torchbearers of a family business. A merger that made a great deal of sense for two companies recently fell apart because each insisted on keeping their names. They felt that adopting the other company’s name would be tantamount to a betrayal of the trust that the family had placed in them. Another deal fell apart over retaining a junior person who had been with one of the companies for over a decade. The other company argued that its person who is responsible for similar chores was better suited for the business going forward.

Some businesses may have more value to a possible suitor than to the existing owner. For example, a company building a portfolio of snack food companies might have been willing to pay Sol more multiples then he would ever get on the market simply because it pays for the buyer to add his company to their portfolio.

Those who fear equity financing should consider whether owning 80% of a larger company and a potentially better bottom line is better than owning 100% of a business with flat sales. Despite the emotions of being part of a merger, from a business point of view consolidation can offer an owner much more than going at it alone. This is particularly true for businesses that are faced with rising costs that seem to be eating up any potential profits.

I had recently read the story of a small copy center in the Midwest that was approached by one of the large franchises. A husband and wife owned the business for 18 years and together they eked out a living. The franchise broker offered them a significant amount of cash plus the opportunity to continue to manage the business for the next 5 years with a salary of both. They declined the offer only to have the franchise open a block away and take away most of their business, ultimately forcing them to close the business.

Businesses who know that marketing is a key ingredient to future growth simply do not have the wherewithal to go forward. They don’t know how to expand the business, think out-of-the box or introduce new components that will nudge the bottom line upward. They should be honest with themselves in realizing that their solution might not be to merely be a survivor like Sol was. They need to come to terms with the fact that a sale or merger could be the right prescription for them or in many cases an exit strategy.

Out of the Box is a collection of strategic marketing articles that Lubicom has published on various topics, trends and ideas in the marketing world. The articles have been published in the Hamodia weekly newspaper circulated on three continents to a readership of well over 100,000.

The name, "Out of the Box" is a term used frequently in business nowadays to describe creative thinking that is not the norm. It is meant to help a business pull away from the pack or separate oneself from the competition. It is to some extent fraught with risk, simply because it is not the run of the mill thinking, but it is at the same time the key to reaching the next opportunity.