Let’s say that a buyer came to you and offered you plenty of cash for your business that would give you total financial security…would you sell?
The BEI 2016 Business Owner Survey found that if you say “yes,” you’d be with 75% of the owners who answered this question. It looks as though a lot of business owners are ready to exit right now—if they get the right price. While most of the owners surveyed say they’d be all set to exit their businesses, there are considerably fewer businesses that are indeed ready for their owners to exit: that same survey found that just 26% of owners thought that they’d have no obstacles to exiting their businesses successfully. But even at more than a quarter of the respondents, that number may be optimistic.
If you’re ready for the sale of your company, but your business isn’t set, you run the high risk of dealing with the frustration of preparing your business for sale after you’ve already checked out mentally and are thinking about cool drinks on a warm sandy beach somewhere.
You really need to ready your business for sale as soon as possible… long before you feel that you have to exit due to burnout, your health, the competition, or other outside pressures. A business succession plan allows you to be certain that you can leave your business on your own terms, while obtaining your financial goals and other exit needs. An exit plan will give you flexibility, leverage, and negotiating power so that you can leave how you want and when you want.
In addition to frustration and added stress that a lack of planning causes, you may unintentionally “taint” the marketplace. It’s a common risk for business owners who jump the gun and try to sell their businesses before the operation is truly prepared to be sold.
A business owner will taint the marketplace when he or she communicates with the likeliest buyers for their business—and those people have little or no interest in buying. In addition to an owner’s time, energy, and effort, he or she forfeits the opportunity to put their business in the best possible light and to present an outstanding first impression.
A business that’s pulled off the market without a sale is thought in some potential purchasers’ minds negatively. It’s hard to re-enter the market once the business is prepared to be sold because once buyers reject a business they’re not apt to reconsider and take a second look. They think they’ve seen all they need to get an idea of the state of the business that was once for sale. Very few will spend more time looking at a business that they’ve already vetted and rejected.
Rather than doing it the wrong way with the dire consequences that are certain to result, a business owner should consider these actions.
Calculate the Business’ Sales Price. Before you make a move and place your business on the market, determine the sales price. If an informed and well-thought-out sales price is not going to be sufficient for you to exit your business with financial security, you should wait. Start to strategize about how you can create sufficient value. Moreover, find out varying ways to calculate and explain its value. Do you have the appropriate multiplier of earnings for your business type? Are there hard assets or other market assets that need to be factored it?
Even if you don’t think you’ll leave the business for some time, it’s useful to have a realistic estimate of your company’s value now. That will help you determine what type of increase in your business’ cash flow and value you’ll need before you can sell profitably. It is imperative for an owner to be realistic about his or her value (“personal goodwill”) versus the value of the business without them once they are gone.
Increase transferable value. Along with the value calculations on the business, you should determine your company’s transferable value. This is a measure of a business’ worth to a buyer without the seller’s continued involvement. In other words, if the business requires the owner to drive the value by maintaining and increasing cash flow, the company—minus the owner—will have very limited value. In this equation, when the owner wants to leave before the business is ready to continue without him or her, they’ll need to develop transferable value. That gap could mean several years of effort to create enough value. When an owner who’s ready to exit sees that it’ll be years before their business has the value to make it worthwhile to sell, they may throw in the towel and settle for a lowball offer or hold a fire sale. That’s why you need to plan and prepare for your sale with succession planning.
Make a Succession Plan. While you are building value and preparing your business for sale, another key component of your strategy must be a succession plan particularly if a sale to an outsider may not be possible. A succession plan is essential regardless of whether you’re selling your business, transferring ownership, looking to retire—planning your exit is a major task that impacts your employees, your partners (or other shareholders) your business assets, your need for insurance and liquid capital, and your tax liability. Before you start on your exit strategy, talk with a succession planning attorney to be certain that you’ve looked at every option that’s available to you.
Prepare your business for a sale before you prepare yourself. This will give you the best opportunity to sell your business when you want, at the price you want, and to the person you select. For questions and assistance, contact NM Law, because the exit and succession planning for your business should start today. Contact us at (949-253-0000) to speak to an experienced succession planning attorney about your company and your plans for the future.
Disclaimer: This article is intended to provide a general summary of laws in the State of California and should not be construed as a legal opinion nor a complete legal analysis of the subject matter. Noelle Minto is an attorney at NM Law, APC in Tustin, California, a law firm specializing in Trusts & Estates and Business Transactions.