"I want to sell my business in the next 1-2 years..."

Many baby boomer business owners are thinking they "are ready" to leave their business in next 1-2 years and begin their retirement or third act in life.  With the economy growing and the number of investors seeking quality businesses to buy, many are thinking it could be an opportunity to "sell high" and accomplish their financial goals.

If indeed there is a desire is to sell within 2 years, and minimal or no exit planning and pre-sale due diligence has been achieved to this point, following are a number of the key planning issues that should be addressed in the first 60 days:

• Establish owner-based exit goals (desired buyer, sale-price, values-based goals, etc.) and do whatever possible to prepare for life after the sale. Survey data indicates most business owners are not happy in life two years after the sale of their business.

• Select a transaction intermediary (Investment Banker or Business Broker).

• Get an estimate of business marketability and value.

• Begin tax planning and pre-sale due diligence.

• Assess and, if possible, enhance business value drivers.

• Take steps to protect the value of the business during transfer (i.e., employee incentive plans/stay bonus).

• Select the remaining needed members of your Deal Team (i.e., CPA, M&A Attorney).

• Review your estate plan and business continuity arrangements.

• Make decisions pertaining to a plan for communicating your plans to employees.

This is not an exhaustive list and only represents what should happen in the first 60 days.  There is much more to do throughout the 2-year period to give yourself the best chance at a successful exit.  So, an immediate priority should be the selection of a trained and experienced Exit Planner to assist with the management of the exit planning project.  Typically someone is going to engage a knowledgeable project manager or general contractor to manage the process for building their "dream house".  In selling a business, there is much more at stake than building a dream house.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Will Your Buy-Sell Agreement Solve Problems or Cause Problems?

The most important business planning document that multiple owners of a business can have is a buy-sell agreement.  A buy-sell agreement provides direction to owners and other stakeholders when certain events trigger the transition of an ownership interest in a business. 

These agreements can be very effective in minimizing uncertainty and indecision during challenging and emotional times.  However, it’s not enough to simply have a buy-sell agreement, it needs to be written skillfully to accomplish the desires and goals of the owner(s).

Buy‐sell agreements, in some situations, can create as many questions, problems, and conflicts as they seek to address.  A primary benefit of having this agreement is to avoid having to make decisions that could lead to disagreements at an inopportune time.  Unanswered questions, outdated agreement language that no longer represents the goals of the owner(s), an agreement that is not comprehensive and too simplistic or was poorly implemented can render the buy‐sell agreement ineffective and fail to accomplish the intended purpose.

Opening questions:

• Do you need a buy-sell agreement, and if so, do you have one?

• Is your buy-sell agreement outdated?  When was the last time your agreement was reviewed to ensure that it still well represents your goals? 

• Will your buy-sell agreement cause more problems than it would solve in its current form?

Too often buy-sell agreements have one or more of these planning gaps:

1. Ignores lifetime trigger events such as divorce, bankruptcy, voluntary exit, and involuntary exit.

2. A simple valuation method that does not consider the ever-changing dynamics and growth of the business. 

3. The timing of valuation is not adequately addressed.

4. When buy-sell agreements are not regularly reviewed, they can become outdated and result in unpleasant surprises when they are needed. Owners rely on Buy-Sell Agreements to manage emotional situations, and if those agreements don’t account for changes in their goals as well as the business, they can cause significant problems for everyone involved.

5. Many buy-sell agreements are too simplistic to manage the personal complexities of the individual owners who sign them, and their relationships with each other. For example, companies with multiple owners often don’t want to treat all owners similarly, or one owner subject to the agreement may be uninsurable. In family businesses, non-business considerations may affect the design of buy-sell agreements.

6. Fails to address threats to business continuity.  Most buy-sell agreements don’t address the challenges that the business, surviving owners, and deceased owner’s family will face after an owner exits. Too often they only address the transfer of ownership upon an owner’s death or permanent incapacitation. For example, if the surviving owner does not have enough assets to satisfy the personal guarantees previously made by the deceased owner, once that financing is pulled, the business may not be able to continue. Likewise, if the deceased owner was the company’s rainmaker or COO and no one can step into those roles, the business may be unable to survive.

7. Buy-sell agreements are typically deficient in considering the financial security of the decedent’s family. 

Questions your buy-sell agreement should answer include the following:

• Are “lifetime triggering events” addressed as well as death and disability?  Divorce?  Bankruptcy?  Voluntary exit?  Involuntary exit?

• What type of valuation estimate is required?  Book value?  Fair market value?  Fair value?  Investment value?  Agreed upon value?

• What is the desired timing for the value calculation?  Date of the trigger event?  Subsequent event?

• Does the entire business need to be valued, or a partial ownership interest? 

• What method of funding will be used to complete the transaction?

  • Cash – Requires sufficient cash flow or reserves to pay the full sale price in a lump sum.  May not be available when needed.

  • Loan – Future credit availability and cost of borrowing are factors. 

  • Installment Sale – Requires repayment from earnings and is contingent upon the future growth and success of the business.

  • Insurance – Provide liquidity when needed for either death or disability trigger events.

• Should the buy-sell agreement method of funding be taken into consideration in the value?

• What method will be used for valuation?  Fixed price?  Formal valuation?  Formula-based?

• Is there clarity as to what is mandatory and optional regarding the purchase or sale of an ownership interest?

• What goals for your spouse and family do you want to be realized if you die, become incapacitated, or otherwise exit the business unexpectedly? 

Contact us today to learn more about our STRATEGY RENOVATION® Business Continuity Plan if you need help creating or “renovating” your plan for the unexpected.

Build and grow the right way...

Like most successful small business owners, George had invested much of his life and resources in his business over the last twenty plus years and realized personal prosperity and respect within the marketplace.  The business had been profitable, with revenue generally stable and increasing, and George continued to see his personal standard of living increase.  

At the same time, George had an ongoing irritant, and that was his inability to "really take a vacation".  George and his wife Susan were able to "get away" a few times each year, but it was seldom more than a week, and he most always remained tied to the business in some way or another while he was gone.  His phone and computer would still see a lot of action on "vacation".

Five years ago, George was "ready to sell the business and retire".  They now had four grandchildren they wanted to spend time with, they wanted to travel, and simply "enjoy life" while they were still very healthy.  George's transition from being "all in" to "I'm done" happened quite fast, surprising both George and Susan.  Coincidentally, around that time, George was approached by a couple of potential buyers interested in purchasing his company.  George was excited that he would now sell his company and he and Susan would be free to do all they wanted to do.

George experienced what he called "a sad awakening" when the most serious buyer made an offer that was significantly less than what George and Susan needed, along with an "earn-out" requirement.  George would have to remain on as an employee for three more years in order to earn 25% of the proposed sale price.  The potential buyer pointed to areas of risk including "the business still runs too much through you George", a lack of management team incentivized to remain during the transition, an inability to produce requested financials in a timely manner, and an unproven growth strategy as reasons for the low offer.

George had a huge decision to make, take the low offer and adjust downward the plans that he and Susan were looking forward to, or, reject the offer and invest more years in building his business the right way for a successful sale in the future.  Not an easy decision considering a few days ago both he and Susan were envisioning travel and "grandkid time" becoming reality within the next few months.  As George is now an employee working hard to earn the balance of his reduced payout, and Susan is doing much of the grandkid time by herself, he came to understand the hard way that you can never start too soon in building your business the right way for a successful exit.

 Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.  

Focus On Driving Your Multiple

The value of your business comes down to a single equation: what multiple of your profit is an acquirer willing to pay for your company?

Profit × Multiple = Value

Most owners believe the best way to improve the value of their company is to make more profit – so, they find ways to sell more and more. As experts in their industry, it’s natural that customers want to personally engage with them, which means spending more time on the phones, on the road and face-to-face to increase sales.

With this model, a company can slightly grow, but the owner’s life becomes much more difficult: customers demand more time and service, employees begin to burn out, and soon it feels like there are not enough hours in the day. Revenue flat lines, health can suffer and relationships get strained – all from working too much. Does this feel familiar?

If you’re spending too much time and effort on increasing your profit, you could find yourself diminishing the overall value of your business. The solution? Focus on driving your multiple (the other number in the equation above). Driving your multiple will ultimately help you grow your company value, improve your profit and redeem your freedom.

What Drives Your Multiple:

Differentiated Market Position - Acquirers only buy what they could not easily create, so expect to be paid more if you have close to a monopoly on what you sell and/or are one of the few companies who have been licensed to provide the specific product or service in your market.

Lots of Runway - Most founders think market share is something to strive for, but in the eyes of an acquirer, it can decrease the value of your business because you’ve already sopped up most of the opportunity.

Recurring Revenue - An acquirer is going to want to know how your business will do once you leave – recurring revenue assures them that there will still be a business once the founder hits eject.

Financials - The size and profitability of your company will matter to investors. So will the quality of your bookkeeping.

The You Factor - The most valuable businesses can thrive without their owners. The inverse is also true because the most valuable businesses are masters of independence.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Know The Value Of Your Business

The business is often the largest asset in a small business owner’s overall investment portfolio. And, as a result, they typically see the future value of the business as playing a key role in retirement or whatever they decide to do next after the business. A critical and foundational element to designing and creating an effective exit plan would be what we refer to as an “accurate financial gap analysis”. Simply put, this is a calculation subtracting the value of all current assets (including the business) from the amount needed for financial security or post-exit goals. If there is a significant “financial gap”, then it will usually need to be filled by increasing the value of the largest asset, the business.

The “fair market value” of a business is the amount agreed upon by a willing buyer and a willing seller, neither of which is under any compulsion to buy or sell, with both parties having knowledge of the relevant facts. And, so as a business owner, you may have the thought or question as to why even bother trying to value the business until a buyer comes along. Why not just wait and see what they offer? The following are some quick responses to that understandable question:

• In planning for the future and how much you will need, you need to know the value of current assets to perform the calculation. The point here is to obtain the best estimate based on financial analysis of the business and current market conditions for a meaningful gap analysis.

• If in performing a financial gap analysis, you learn that there is indeed a gap to be made up by increasing the value of the business, it will be important for you to know the real value now and what you will need to do in order to maximize sellable value to attain your goals.

• If you receive an offer at the deal table and have not obtained a prior estimate of value from a valuation specialist, you will not be in your strongest position for negotiations. As a result, you may experience doubts during the negotiation, and regrets if the deal actually goes through.

These are just a few reasons to know the value of your business. There are others. We like to say, “Don’t wait until you feel pressure to begin planning”. If you wait until you’re ready to exit to obtain an objective analysis of the value of your business and perform an accurate financial gap analysis, you may find that you’re nowhere near ready to leave.

Don’t wait until you feel pressure to leave your business to begin planning. Get started today in completing our 15-minute exit readiness assessment, and receive a 12-page report with scores in 4 key planning areas. We do not ask for confidential information.