Preparing Your Business For Transition
Business owners focus intense energy on growing the business, increasing revenues, finding new customers – but precious little time planning an exit strategy for the business.
Yet energy spent growing a business is largely futile if it is not properly transitioned, and its value is not fully realized. In a study of 300 former business owners who recently sold their companies, only 25% felt the sale accomplished their personal and financial objectives.1
Undoubtedly, much of those disappointing results can be attributed to a lack of planning. Nearly two-thirds (64%) of business owners over the age of 50 have no succession plan for their business.2 Here are some things to think about:
Have you had a valuation done recently so that you know what the business is worth?
For most business owners, the business is their single biggest asset. As such, it is important to have a good idea of its current valuation and how it compares to similar size businesses in your industry.
Do you know what the business needs to be worth in order to meet your goals?
More often than not, entrepreneurs nearing a liquidity event do not have a good answer to this question. Yet to have the confidence required to follow through with the biggest single transaction of your lifetime, you need to really know and understand how much you need to net from the sale of the business to be financially independent.
This is where ‘what if’ scenario modeling can be extremely helpful. If an initial offer has been made to purchase the business, it is helpful to have it modeled it different ways by an advisor. Sometimes this means running a worst-case scenario which only includes cash upfront. Then, perhaps, another scenario that includes different contingencies of an offer such as an earn-out or salary continuation.
The goal of seeing a range of outcomes is that it can help you become more comfortable with your minimum retirement funding requirements and, as a result, have a lot more confidence and intentionality during the sale process.
Are you familiar with the most common mistakes business owners make when selling their companies?
Any business owner should be commended for successfully growing a business and creating wealth, but selling a business is a whole different sort of challenge; most often it is one they haven’t faced before.
Seventy-five percent of entrepreneurs have never tried to exit a business.3 So why not learn from the most frequent mistakes others have made in order to avoid the same pitfalls? This is the value of working with the right team of advisors.
At Brown and Company, we’ve leveraged our experience in having worked with many former business owners who have sold their companies to create our Buyout Barometer™. It is designed to help business owners assess the relevant factors involved in transitioning to a successful retirement.
Who runs the business if you are no longer around?
All the previous questions assume a planned exit whereas this one is about the “unplanned” exit scenario. In the event of death or disability, continuity of the business is reliant on having appropriate legal documents (i.e., buy-sell agreements), meeting short term funding requirements (i.e., life insurance), and grooming strategic leadership and operational management to step in.
The business only exists because of the owner’s ideas, persistence, and skills. Yet, ironically, as the business grows, its value is negatively correlated to your direct involvement. This is due to the fact that a business which is contingent on one person always has more risk (and therefore less value) to a prospective buyer.
The most valuable businesses are those in which the owner has made himself or herself inconsequential. In these cases, the business is built on repeatable systems and processes that can be replicated and scaled.
Therefore, several of these objectives – maximizing business value, preparing for sale, and preparing for an untimely exit – force you as the owner to ask a difficult question. How do I make myself less consequential to the daily operations of this business?
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1 Jackim, Richard E., The $10 Trillion Opportunity: Designing Successful Exit Strategies for Middle Market Business Owners, Second Edition, 6/1/2006
2 Frank, Robert, “If you do this, you’re smarter than most millionaires,” CNBC, 3/15/2016.
3 2014 Business Enterprise Institute, Inc., www.theexitfactor.com/sites/default/files/business_owner_survey.pdf