Written by Byron Roth, CEPA
Byron Roth Consulting, LLC & The Alternative Board Lehigh Valley
Over the last several months I have been involved in an increasing number of conversations with business owners who are seriously considering selling their businesses. However, most did not know their exit options or how they could maximize their business value. If you are thinking about transitioning out of your business, here are some facts from business owner studies over the last few years that you should understand and consider.
- Only 20% of businesses wanting to sell are actually ready to sell
- Just 5% of the businesses sold are at a value the owner wanted.
- 80–90% of an owner’s wealth is locked up in their business.
- 50 percent of all business exits are forced and do not occur on the owner’s terms or timeline. Usually one of the five D’s is the cause: death, disability, divorce, distress, or disagreement.
- Recent events are further complicating the exit process as more businesses owners are looking to exit. A recent survey by the Exit Planning Institute identified that 71% of business owners are planning to exit in the next 5 years and 92% within the next 10 years. Interestingly 88% of respondents were under the age of 50.
What Does That Mean For You?
Unless you have a plan in place to make your business valuable to others, you have a high probability of not selling your business or selling it for less than you need or desire. Failure to provide for the continuity of your business impacts not only your personal wealth by limiting the value you can extract from your business, but also the future of all other stakeholders who depend on the business’s successful transition (employees, vendors, customers, charities, and the surrounding communities).
An effective written exit plan is a critical strategic business tool that will create more income today, empower your management teams to continue to grow your business, create owner independence and real value for the next owner.
So How Do You Get Started?
The first step is to assess where you are today. This will require an honest assessment of the following items:
1) Assess your personal future. Do you have a formal specific plan for what you will do once you no longer work in your business. Unfortunately, many of us do a poor job of planning for life after work. How you spend your time and what you want after the sale impacts the financial resources needed. Take some time to plan for your future by documenting how you would like to spend your time. If you have never thought about your personal vision, check out the article I wrote in the Fall 2020 edition of this magazine.
2) Assess your future personal financial needs. What is the gap between what you need for retirement and what you have available without considering your business. Consider how much of your current lifestyle is supported by the business that will need to be funded by your available resources. You need to understand the gap you have to understand what you need to harvest from your business to support your intended lifestyle.
3) Assess your business – This will probably require some outside unbiased help.
a. Evaluate your current financial statements that exist for tax purposes. Does the income statement reflect the true cash flow benefit assumed by the owner or future owner. Most businesses have discretionary and one-time expenses that need to be normalized.
b. Evaluate your people. Is your organization able to operate independently from you or are they very dependent upon your day-to-day involvement. Are they capable of running the company. Your employee capabilities can have a significant impact on the intangible value of your business.
c. Evaluate your clients. How dependent is your business on a few key clients. Is there client “stickiness”. Is it easy for them to switch to someone else. Are they heavily dependent upon you the business owner. Uncertainty in future business will have a significant impact on the attractiveness of your business.
d. Evaluate your systems. A business with well defined and documented systems and processes will have a much greater intrinsic value and will be more attractive to a new owner.
Whether you are looking to exit in the near term or longer term, focus on the value of your business. Driving real value in your business and increasing the attractiveness to future buyers will also provide other positive outcomes, including increased sales and higher profits. Integrating written personal goals and financial plans with business planning enables you to maintain your focus on protecting, building, and harvesting business value. Preparation today is critical to enable a successful exit of your business.