Congratulations on what you’ve done with your life. Honestly, my hat is off to you and you have my utmost respect. Just take a moment to reflect on all you have accomplished; family, friends, career, reputation, respect, education and, maybe you’ve built a business as well. You’ve done a lot and if you are a business owner, much of your wealth is probably tied up in the business. The key issue for business owners, especially for baby boomers, is that the wealth you have accumulated in your business may not be as easy to convert to cash when you need it as you would like to think. That’s a fact. In fact, for many it won’t be convertible at all or, if it is, the actual cash realized will fall far short of expectations.
Consider this, there are 22 million private business owners in the U.S. today, 12 million of whom are baby boomers. 70% of those baby boomers will be looking to sell their businesses in the next 10 years or so. Of that number, it is estimated that only 20% will be successful. There are literally trillions of dollars of personal wealth in American companies today that will never be turned into cash! You can significantly increase your chances of beating those odds by following these two suggestions which I’ll explain in more detail in a moment:
1) Build your business around a well-defined set of goals and a well-conceived business plan and ensure that your financial processes are sound
2) Plan for the day you will leave (or exit) your business; keeping in mind that for many that day is not a matter of choice. Things happen that are beyond our control. Will you be financially and emotionally ready for that “day”? That’s the $64,000 question (Oh, if it were only $64,000!).
Let’s talk about these suggestions in a bit more detail;
Build your business to maximize its value
Here are 5 things you can do now to strengthen the value of your business.
1) Define your business goals and create a well-structured business plan. These two items are your roadmap to success. Without them the old adage that “failure to plan = planning to fail” is absolutely true. Included in this item is the use of an annual budget to help you track progress.
2) Ensure that your accounting system is adequate & is being used properly. This includes ensuring that you have appropriate financial controls in place to mitigate the risk of fraud.
3) Expect timely, accurate financial statements from your chief financial person. These should include monthly revenue & expense forecasts, cash flow projections and comparisons to budget.
4) Formalize a cash management program to ensure that your company always has the cash it needs. This requires someone who understands the flow of cash in & out of your business.
5) Define internal processes & procedures & review them annually to eliminate waste. Many times I have seen processes that have evolved haphazardly over time and are full of tasks that are redundant, don’t add value, are counterproductive or can be automated. All represent opportunities to cut costs and give you cash that could be used for better purposes
In attacking the items above you might also want to consider why many businesses won’t sell.
- The owner is too involved in the business for it to transition successfully. In other words, there is no business without the current owner. So, if you ARE the business, there may be nothing to sell.
- Keeping family and key employees in the business is more important than selling the business
- Buyers can’t achieve financing
- Trends in the economy that work against the transaction
- Unreasonable price expectations of the seller
- Inadequate financial records or records that don’t support a sellers price point
If you pay attention to the items mentioned above, you will take a giant step towards building a solid foundation for your business that will maximize its value when the day comes for you to leave.
Start planning for your exit
Planning for the day you leave your business (and all of us will leave our businesses one way or the other) is a process not an event. It often takes years to develop a plan with the help and guidance of a team of advisors each of whom brings a wealth of experience in their respective fields. Who are these advisors? The team could include your attorney, accountant, financial advisor, insurance advisor, mergers & acquisitions advisor, and valuation advisor. And, like any well run team, it also needs a quarterback; someone to ensure that everyone on the team is on the same page and are working in your best interests simultaneously.
The key consideration for the development of an exit strategy is the financial and emotional readiness of the business owner. Imagine a quadrant, if you will, where the vertical axis defines your financial readiness from low to high and the horizontal axis represents your mental readiness to leave the business, again from low to high. For each position on the quadrant there are a range of options that can be employed to help you realize your goals. The higher you are on each scale, the more options will be available to you. So the quarterback’s role is to help you reach the optimal point on that scale.
As with your business, begin the exit planning process by defining your personal goals then find an experienced professional who can help you strengthen your business, maximize its value and achieve your personal and business goals. It is never too early to start. Not to be trite but remember that tomorrow never comes. Start today.