Every business owner knows that he or she will exit his/her business some day and, with luck, that will be a day of their choosing with enough income from the deal to live happily ever after. That won’t happen for most business owners who will be looking to sell their business in the next 10-12 years (and probably not even for the vast majority) because they will have failed to plan and prepare for the event.
Planning to leave one’s business is a critical process if an owner is to realize his or her dreams for the next phase of life. Far too often owners find too late that the business isn’t worth what they thought it was when they are finally ready to make the transition. And, often the difference in expected value and realized value is measured in orders of magnitude of bad news rather than by a few percentage points. Another common issue faced by business owners is that they encounter unexpected situations that force their exit before they are emotionally or financially ready. Either situation can be disastrous but the risk of both can be significantly mitigated with good planning and preparation.
Regarding the second issue mentioned above, the need to exit a business before an owner is ready: things happen that are beyond our control such as: accidents, illnesses, a seismic shift in an industry that drastically reduces the value of a company’s goods or services; economic downturns. Or, the business may experience a fire, flood, theft, embezzlement; you name it; against which there is inadequate insurance.
Regarding a business’s worth, business owners nearly always have a preconceived notion about the worth of their business. Often that value is far from reality. Why? Well, there are several reasons but here are two that are common and avoidable.
- The first results when an owner has built a business around himself. So, when the owner is taken out of the equation there is little or nothing left to sell. Building a business around oneself is a trap people who have built a business from scratch fall into all the time. It’s very difficult to make the emotional switch from managing every aspect of a business to developing a team that is self-sufficient. At B2B CFO® we call that trap the ‘growth transition’ and we have years of experience helping business owners through that difficult transition.
- A second reason businesses fail to produce an expected payoff at the time of sale is because the owner doesn’t recognize that a business is very much like a commodity unless the product or service it produces is truly unique, and that is rarer than many think. Today, and for the next 10 – 12 years, there will be about 12 million baby boomers looking to sell their businesses. On average that means that the number of businesses for sale in the U.S. in any given year will be about 10 times greater than the average before this tsunami. And, the impact will affect anyone who is looking to sell a business during that time frame whether or not they are a boomer. In short, it has become a buyer’s market for most businesses. Buyers can afford to be choosy and that is driving prices down.
So, how does a business owner protect his / her future given the risks of the unexpected and the increasingly competitive market place? There are four key steps. The first is to recognize that the unexpected can and does happen, so prepare for it. Second, recognize that a business that is built around one person has minimal value regardless of how dearly its customers treasure it. Third, look at your business as a commodity and understand that buyers will be most interested in companies that; (a) are turnkey operations, (b) have a strong earnings profile with minimal risk, (c) have well documented processes and procedures and strong financial controls, and (d) have financial data that is accurate and fully supported. The fourth and final step is also the most important. Call an expert who can help you create and implement an effective transition plan (exit strategy). Whatever you pay that person may be the best money you ever spent and will be a drop in the bucket compared to the value they will bring to the table at the time of sale. He/she will help you maximize the value of your business to any potential buyer regardless of type (external, employees, managers, etc.). B2B CFO® partners use a nationally acclaimed and proven process that is documented in The Exit Strategy Handbook. Contact me for a free consultation and a free copy of the book.