Thinking of Selling Your Business?
Let’s Talk About Your Exit Strategy
What?!? You’re thinking about selling your business but you don’t have an exit strategy? Well, it pains me to tell you this, Bucko, but you’re not alone.
UBS – the Swiss global financial management firm – recently released its quarterly Investor Watch Report. This one focused on business ownership in the small- to medium-size business segments. The survey UBS conducted of business owners boiled down to what the owners hopes are for their business when the eventual transition comes and what their plans are to realize those hopes. The results were stunning. Fully 48% – almost HALF – of all owners of small and medium-size business have no plan – no exit strategy.
I’ve ranted about this topic in the past both on this blog and to hundreds of business owners I’ve coached or taught in formal classes. Having an exit strategy when you start or buy a business makes it that much easier to execute rational and informed decisions when it’s time to sell. And you WILL sell at some point.
My oft-stated warning – “Any business that does not fail will eventually sell or otherwise be transferred” – is as certain as a sunrise. If you own a successful business, it will, at some point, be sold. Maybe to your kids, maybe to a stranger, maybe to a larger company in a strategic acquisition. But you can count on this: it will be sold. If you don’t plan for that certain eventuality, it will most likely sell for much less than what you want or need.
But the News Gets Worse!
That’s right – worse! When UBS asked the owners what their preferred exit would be, selling the business was the choice of 52 percent of the respondents (41 percent plan to do so within five years). Another 20 percent said they plan to leave it to family, 18 percent are going to close the business, and 10 percent don’t know.
These are astonishing figures!
Eighteen percent plan to close their business?!? I am nearly beside myself with bewilderment! The owners worked for however many years, built a business and will just close it?!? How is this possible??
Every business – even the smallest – that is successful – by which I mean generating enough income to support the owner and his or her family – has some value. That someone would simply close it and wash that value down the drain is beyond my comprehension.
As to the 20% that plan to leave it to a family member, UBS wisely followed up with said family members, generally the next generation. What UBS found should open some eyes.
How do the heirs feel about inheriting a business? Not very positively.
More than 4 in 5 or 82 percent would rather have the money from the sale of the business than take over the business. Only 18 percent said they wanted the business. This is probably why 89 percent of owners said they won’t be able to pass their business on because family members are just not interested.
I’ve riffed on this aspect as well. Selling a family business is a major challenge but mostly because the owner – who may have started the business – usually wants the next generation to take it over. This almost never happens.
Do You Have any Idea What It’ll Take?
In its report, UBS points out that the majority of business owners don’t have much of an understanding of the process of selling a business; of what they’re in for when the time inevitably arrives. It also identifies a significant knowledge gap as to timing: 75 percent of owners believe they can sell their business in a year or less. This is on top of the 58 percent who have never had their business formally valued, and the 48 percent without exit strategies. (The UBS survey was of 2,245 high net worth investors that were or recently have been business owners.)
My friends, this is a disaster of the first order!
Stewart Kesmodel, Head of Global Family Office, Americas for UBS Global Wealth Management, explained in a press release some of the challenges of selling a business as follows. “Selling a business successfully requires a great deal of planning, which owners often underestimate. Before pursuing a sale, it is important for business owners to not only have a view on the value of their business to potential buyers, but also an understanding of how that price applies to their personal needs post-transaction.”
Did you see that part about “…which owners often underestimate”???
I would offer a clarification to the estimable Mr. Kesmodel. To wit: “…which most owners haven’t given even the first thought to!”
The Three Legs of the Exit Strategy Stool
There are many issues to consider when developing an exit strategy but they can generally be grouped in three categories: Your business’ valuation, the owner’s post-sale plans and desired lifestyle, and timing.
Do you know what your business is worth? Of course not! If you knew what it was worth you’d be a professional business broker! Well, maybe not, but my point is that you’re running your business. You don’t have the time, knowledge, experience or resources to determine what your business is worth. You might take a guess and that guess might even be close. But even if it is close, you likely have no idea how to justify the value when negotiating with a buyer.
When you get a professional to value your business, you get a lengthy document – similar to an appraisal for a house or other real estate and with a lot of professional credibility behind it – that clearly shows what your business is worth and the report’s conclusions are very difficult to argue with. That does not mean that there won’t be some negotiation; there will be. But both parties will know approximately where any agreement is going to end up – at least with regard to value. (Terms are a different story.)
2) Seller’s Needs
Do you know what you need to live on after you sell? I’d bet you don’t. Do you even know what your plans are – what you’re going to do? Not having something to transition into – even if it is simply a retirement of sitting on the porch contemplating the clouds – is a recipe for disaster on two fronts.
First, most people have to have a purpose; a reason to get up in the morning. As I’ve written about my own personal experience, it is extremely unsettling to suddenly have nothing to do after many years of running and being identified with your business.
Second, you need to know how much money you’ll need to do what you want to do or live how you want to live after the sale. Sitting on the porch contemplating the clouds requires a certain amount of money. Traveling the world on a private yacht is another story altogether.
Knowing what your business is worth and what you need to live on after the sale are arguably the two most important factors in understanding what is possible, what you have to achieve in order to reach your objective and enable you to plan accordingly.
First, even a properly-priced business takes a long time to sell – 10 to 12 months and very often longer. An overpriced business may never sell. (Do you see the importance of having a professional valuation done?) An old saw that I use all the time with business owners goes like this: “The only reason anything – be it a house, a Skilsaw, a business or a pound of Idaho potatoes – does not sell is that the price is too high.”
Do you have a target price for your business – a number that covers what you’ll need to live the way you want to after the closing? Do you have a target date for that transition? Have you planned how you’ll hit those targets? Are you in the process of preparing your business for the big event? If you’ve not gotten these ducks in a row, you are likely in for a rough and frustrating time, a lengthy process and probably a rude awakening.
Planning an exit strategy is not something that can be done over the weekend. It requires thought, input from various people (not least of whom would be your spouse or partner), serious consideration of timing and target valuation, and a vision of your future. It can seem like an overwhelming project. But if you want the most from your business and the most out of the rest of your life, it must be done. And I’d like to make the effort easier for you.
We’ve put together a five-step process on getting started and it’s free if you just tell me where to send it. In it you will see the first general steps that you need to take to start the exit-planning process – steps that will lead you to further steps.
In addition to those steps for getting you ready for a sale, we’ve got a couple of podcasts about getting your business ready for sale. They’re here. Scroll down to episodes 3 and 4.
So, what’s the bottom line? Plan early – at least three years and preferably five – with different exit strategies in mind. This will allow you the flexibility you need to get the most out of your business, whether you sell it, pass it on to someone in your family, or have someone else manage it for you.
Would you like some help with any of this? Would some guidance or coaching help you get started or flesh out some thoughts? If so, first, order the Five Step Process above then let me know where you are in the process and what questions you have (see the email link at the bottom of this post.)
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. For instance, what is your biggest concern about the thought or process of selling your business? Let me know. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!