Why areyou selling?

While it is not absolutely necessary that a buyer know the real reason why a chemical business is for sale, it is nevertheless an important question to ask. It is also a question that sellers will often answer with vague generalities that have little meaning.

Thus, for the buyer, the stated reason why a chemical business is for sale must frequently be taken with a grain of salt. Continued probing is often called for to determine if the stated reason reflects the seller's true motivations.

In the article that follows, we will review some of the real reasons and some of the stated reasons why chemical businesses are sold, including those chemical businesses that are small and/or closely-held, as well as those owned by larger, public companies.

• The business is not a "core" business.

This is a very common reason given by large public companies when they decide to divest a part of their company. As illustrated in the cartoon, this also is a very malleable concept, devoid of any substance. And so it behooves a buyer to look behind this stated reason in order to find out exactly why the business is slated for divestiture.

• The owner wants to retire

A common reason given by owners of smaller, privately-held chemical companies. Most of the time, this stated reason can be taken at face value. But not always. If a 55 year old owner says this, it may require more probing than if it is said by an 80 year old.

• I've done as much as I can. I need to find a buyer that can take the business to the next level

Owners of smaller, closely-held companies will often say this is why they are selling. Frequently here the owner is the founder of the business who started from scratch. Maybe he/she is conservative in his/her business practices, averse to taking big risks, or taking on debt to fuel expansion via a new or bigger plant, expanding into new geographic or product markets, the hiring of additional sales/marketing personnel, etc. There are many situations where these reasons are real. In some cases, the owner is burned out. But buyers are best advised to probe nevertheless.

• At the right price, anything is for sale

This is also a comment frequently made by owners and companies when asked if they would consider a sale or why they are selling. Sometimes a seller who says this is just playing hard-to-get. But frequently it is true. If the price is high enough, many owners/companies would sell their business. If the price is not high enough, they are perfectly happy to continue to run the business and grow it.

• Desire for liquidity

With smaller companies and privately-held businesses, the need to "monetize" the owner's investment is frequently given as the reason for selling. This can be driven by a desire of family members in a closely-held company to cash out and move on to something else. It also can be driven by a need to get out from under burdensome debt or to improve a company's balance sheet. There are a whole host of reason why chemical companies both big and small divest in order to get cash.

• Business is mature and/or deteriorating

Rarely will a seller give this as the reason for selling, so it behooves a buyer to make sure it understands the business well enough to determine if this is the case. General industry trends may be pointing downward, or perhaps the seller has lost or is facing the possibility of losing a big customer or a critical supplier. These factors do not necessarily mean the business should not be acquired - many businesses that are mature or in decline can make for excellent acquisitions. It just means that the buyer should not be putting a value on the business with the assumption that it will be growing.

• Need to meet wall street's expectations

A public company's sale of a business or division at a book profit may boost earnings per share. If the company is struggling to meet Wall Street's expectations, a divestiture may be needed in order to get EPS where the Street is expecting it to be. This also is rarely a stated reason why a business is for sale, but a savvy buyer who understands the seller's true motivations in this instance can often drive a hard bargain given the seller's need to close by a specific deadline.

• There's a New ceo

This is another reason why chemical businesses are sold by larger companies, and this is also another reason not often stated. New CEO's often want to make changes and shake things up. Sometimes for no good reason. M & A activity is a frequent tool used in order to effect change when a new CEO comes on board.