Selling A Business Is A Process, Not An Event

My clients often hear me say that they should be planning ahead 2-3 years before taking their business to market.  While some business owners take it to heart, the majority of Principals I speak with will operate for 10/20/30 years and only have their first in depth conversation with an advisor months before they hope to retire or months after they have burnt out of running their business.  From my perspective, these individuals are setting themselves up for failure. 

I don’t define failure as the inability of an owner to sell their businesses, though that may very well be the case.  Failure to me is leaving money on the table or creating unnecessary challenges and stress in a transaction.  We’re not talking about a reduction in value of 5%-10% (which isn’t insignificant).  I’ve seen scenarios where valuations are hit by 30%-40%.  Even worse, in those situations, it’s likely that financing is hard to come by, so a $1 million business turns into a $600,000 business with the owner only receiving half up front and carrying a note for the $300,000.  Perhaps now I have your attention.  My objective is to identify issues that I continuously see with the hope to incentivize business owners to begin planning their exit strategies early and to incentivize their advisers to bring these topics to the forefront.  Over the course of the next few months, I will dive into various issues which include:

Valuation: Have you had a professional valuation done? Most business owners think their business is worth significantly more than the market will prove to be true.  If this is your retirement plan, shouldn’t you align your expectations early?   In this article, we’ll explore how buyers and banks look at valuing businesses and why the multiples are not anywhere near the levels that the S&P 500 trades. 

Tax Consequences: Have you looked at the structure of your business and spoken to your accountant about whether you are set up properly given your ultimate exit plans? In many instances, being a C-Corporation can have severe tax implications.  In this article, we’ll explore how you are taxed in a sale and why most shareholders of C-Corporations should call their accountants immediately.

Get Your Financial House in Order: Will your P&L and balance sheet cause unnecessary confusion? Perhaps you have multiple businesses under one tax return.  Maybe your P&L is on cash accounting and your tax return is on accrual accounting.  In this article, we’ll explore various things you should be doing to show your financials in the best light.  

Continuity of Earnings: Are you the rainmaker? Do you have concentrations of revenue among a few key customers? Concentration of vendors? In this article, we’ll explore red flags that buyers will identify regarding future success of your business and how this impacts valuation or deal structure.

Know your business: Are there metrics in your business that a buyer will find interesting and are you tracking that data? Can you explain the anomalies that are evident in your P&L? In this article, we’ll explore the types of things buyers will want to know about your company and why your shrugs will cause them to discount your valuation.  

With the knowledge of things that may impact your valuation and deal structure, you will be more prepared to align your day to day decision making with your exit planning strategies.  Don’t wait until it’s too late to begin having these important conversations with your business and financial advisers.