February 10, 2016
By Larry Reinharz
We recently obtained a new client, an IT Hardware and Service provider. The five owners, aged late 40's to early 50's, started the company in 2006, and this year will realize approximately $75MM of revenue with very healthy profit margins. The company has a strong backlog and enormous growth prospects. While they take turns running the company as CEO, all of the owners meet regularly and are very cohesive. The current CEO is very excited about the company’s growth prospects, and he and his partners all enjoy what they do (“I haven't worked a day in my life!”).
So why do they want to sell the company?
The current CEO told me a story about him and his brother going back 30 years ago. They opened a few retail stores in an entertainment niche (It was legal! I'm being vague here for confidentiality purposes) and grew to five locations–the sky seemed to be the limit. At that point, there were about 100 retail stores in their market area in the same niche. A larger chain then approached them with a very healthy cash buyout, and him and his brother turned it down—“the sky's the limit, we're making lots of money and opening new stores, why would we sell now?”
About two years later, there were approximately 1,500 retail stores in the same niche, and the competition was intense; the stores became money-losing entities, and the two brothers lost the bulk of their investment in the stores.
So, this CEO and his partners would prefer to “sell too soon” and secure their financial future.
Going from zero to $75MM in ten years eats up cash, so the owners have plowed back the bulk of the profits into the company to finance its growth. They are similar to the bulk of our clients who have reinvested to grow their companies, and the biggest segment of their net worth is their business interest.
As the current CEO told me, “We're passionate about our business, which has been the driving force behind our success. At the same time, you never can predict the future. Our business is doing far better than any of us ever thought it would, so we'd be foolish to miss out on securing the financial well–beings of our families if we did not strike while the iron is hot.”