In the past year I have helped three different business owners prepare their businesses for sale, helped them put a fair market value on their businesses and helped them negotiate a sale. The whole exercise is fairly complex and there is a whole lot more to it than most owners realize.
Almost every good business advisor - including yours truly - will tell you to start planning your exit strategy the day you start or take over your business. Thinking about how you will leave your business should start on day one! Unfortunately, very few owners give any thought to this unless, of course, they have just had a string of unbelievably bad days and they never want to hear, or see, their business again. I can remember one time while I owned my business that this happened to me. As I remember, a nice long weekend with my wife at Lake Tahoe got me out of my funk and back to having fun running my business.
Here are the abbreviated scenarios of the three situations I was involved with this past year:
- The first was a medium sized, one branch plumbing wholesaler that operated a 6,500-sq.-ft. showroom on site. The business was owned by a second generation husband and wife. The husband ran the wholesale side and the wife ran the showroom. They were both worn out. The business was very profitable and they had current, accurate financial statements. They played very few “games” in terms of how much they took out of the business and how they took it out. This was a fairly easy job of putting a valuation on the business and finding several interested buyers. From beginning to end, the process took approximately six months. The owners now spend about half their time at a home in the mountains and the other half on a beach in Florida. Very nice!
- The second business was a plumbing wholesaler and these folks also operated three showrooms. A very hardworking woman in her mid-60s was the owner/boss. Her husband had just retired from a lifetime job in a totally different field. A son worked in the business, but his health had not been good for several years. The idea of selling the business came about when a large wholesaler picked up the phone and asked if there might be any interest in selling. Financial information was exchanged and the offer was made. Hence a call to Darlington Consulting to help evaluate the offer. It didn't take long. It was an almost insulting “lowball” offer. After an in-depth evaluation of the business and what the owners wanted, the business was taken off the “For Sale” block and put in a trust for the son and other heirs. A general manager was hired to run the business on a day-to-day basis. The owner has tapered off her daily involvement and is traveling and spending time with her newly retired husband. Another happy ending!
- The third example is different and most likely more typical of situations I see. Again it's a small business - operating as a REWHO (retail and wholesale). It's a one-branch operation that has an 8,000-sq.-ft. showroom as part of it. The showroom accounts for about 50% of the total business. The showroom displays and sells decorative plumbing and hardware products and sells a great variety of tile products and lighting fixtures. The business is owned by a husband and wife, and one son works in the business. Both the husband and wife are strong salespeople and weak, I mean weak, managers. The financial information generated was sporadic and incomplete. The main mode of operation was pay Uncle Sam as little as possible and take as much out of the business as possible (any way possible). I got the call to put a value on the business and to market it. It didn't take long to realize that a lot of work would have to be done before any valuation or marketing could be done. Real and honest information would have to be developed. The owners would have to stop playing “games” and would have to send every dollar possible to the bottom line. This, after all, is one of the main pieces of the formula that allows the seller and buyer to arrive at a fair market value. To make a long story short, these owners are committed to staying with the business for three more years with the goal of developing honest and valuable information. Plus, they are committed to working harder to become better overall managers.
In all three cases there was no well-thought-out exit strategy. So, just how does one start to plan the exit from a business?
DEVELOPING A SUCCESSION PLAN.No one likes to think about their death or that they might become incapacitated in some way. But, should this happen to you, without a plan in place, what would happen to your business and to your family? Succession planning is your way to ensure the continued viability of your vision and therefore should be a key part of your business plan. You need not only create a succession plan for your own sake, but it is something you owe your employees, vendors, customers, family and/or investors. They all depend on your business to some extent for their livelihood.
Succession planning is the process whereby replacements are identified and groomed, not only for the “top spot” but for other key positions as well.
As you begin to develop a succession plan, you will need to answer these three questions:
- What is your vision for the future of the business in your absence?
- Who can best implement that vision?
- What plan can you create to see that the vision is carried out?
Whatever plan you create needs to be memorialized in two places: it should become part of the operating agreement of the business; and, if ownership shares are being transferred, it must be detailed in your Will or Living Trust.
And last but not least, put your succession plan in writing so that there will be no mistake regarding what you want.
Depending on the size and complexity of the business, you could have several options to your exit strategy:
- For a really small business the owner might choose to simply liquidate and close the business - electing to retire or move on to another career.
- The owner might elect to sell the business to someone or a group of people that currently work in the business.
- Or, the business and property could be sold to an all new owner - keeping the staff in place.
SELLING YOUR BUSINESS.Let's assume you've decided there is no suitable successor to the business and you want to reap the benefits of your hard labor and move on. A business sale requires forethought because it is a complicated, time-consuming transaction. Finding qualified buyers, going through your books/inspections, transferring real estate and closing the deal can take a long time. Here are several things you will need to do:
- Get your ducks in a row. Like the sale of a home, the sale of a business requires that you increase the curb appeal. Do everything possible to make the business show well.
- Get your books in order. One reason buyers purchase existing businesses is because they want to reduce their risks - and the only way they can see if your business is “risky” or “safe” is to look at your books. All records - profit and loss statements, balance sheets, tax returns, contracts, permits, leases, etc. - need to be in order.
- Get a business valuation. Too many folks, including all three of the people I worked for this past year, had an inflated value of the business in their minds - especially the part referred to as “good will.” Therefore, it's wise and prudent to pay for a professional business valuation early in the process so that you know what to expect and will be able to honestly evaluate any offers you may receive. The value of your business is based on its profitability, good will, assets and liabilities. If you are guilty of playing any “games” concerning any areas of financial reporting - you'll have to cease and desist if you want to maximize the sell price.
- Boost your profit. Do everything possible to make your business look as profitable as possible. Most buyers will be looking at three to five years of profitability - so, yes - it takes time to build the best case scenario.
- Have a written, formal employee handbook and a company policy and procedures manual.
- Talk with your advisors - your accountant, banker, attorney and any other professional that can help you through the selling process. This can add substantial value to your business. It tells the potential owners exactly how the business is operated.
- Consider using a business broker. There are professionals that help market and sell businesses. They are like real estate brokers except they deal in the buy-sell of businesses.
- Mergers and acquisitions have been very popular in recent years. This is where your business would be melded into another business.
The future is in your hands. Don't wait to start planning your exit strategy. Start NOW - TODAY! Good luck!