The Business Owners’ Special Series (B.O.S.S.) No. 35
By Rich Gunn, CEPA, and Kemp Moyer, CVA
For business owner-operators who want to maximize the eventual value of their business in sale, it is critical to prepare in advance so that market forces do not dictate the process. More than half of the businesses that go to market are sold for the wrong reasons. Causes of this may be market forces or personal situations outside of the owner’s control — and when the applicable businesses have not been properly prepared for a sale. These circumstances most often arise when there is a death or disability of an owner, a decline in the economy, disruption in the company’s industry, or other unforeseeable disasters for which the business was unprepared. Most recently, the COVID-19 pandemic and resulting economic impacts have caused many closely-held businesses to face less-than-optimal liquidity scenarios.
The common result of selling a business that is unprepared for sale is that the business exit results in a low valuation. However, that is not the only problem faced by an unprepared business owner. Others include: The seller lacks control of the exit process, pays too much in taxes or does not receive the sales price required to achieve the owners’ post-exit desired lifestyle. In short, an unprepared exit is often a hasty, chaotic and panic-driven process. According to research conducted by the Exit Planning Institute, more than 55% of business owners suffer the consequences of selling their business in these circumstances. Furthermore, 75% of sellers express post-sale regret, and only 5% are satisfied with the sales price.1 A hasty, unprepared and under-advised exit scenario is not a recipe for lasting peace of mind for the selling owner.
Some unanticipated exits occur when there is no catastrophe, but rather when the owner receives an unsolicited offer to buy the business. In this case, the business owner may consider the offer to be a “good price” and move forward with a sale transaction. However, given the impact of information asymmetry in the marketplace, there is still a very high chance such a seller will not be receiving the full value of their business, unbeknownst to the owner who may be dazzled by the price being dangled before his or her eyes. If the owner has not thoroughly prepared the business for sale, it is highly likely that the business will be sold for far less than its potential value.
While the above scenarios are common outcomes, there is some good news here: The catastrophic results that plague unprepared business owners are easily avoided with the proper ongoing preparation. Business owners who take proactive steps can have a huge, positive impact on the exit value of their business, regardless of the timing or reason for their exit. To paraphrase the old adage, it is far better to get and stay ready upfront than it is to hastily play catch-up at the last minute.
Maximizing Business Value
For business liquidity scenario success, it is not only about the numbers. Profitability is important. Revenue growth is important. Cash flow is important. However, there are often complex intangible business elements behind these numbers that will either enhance or drag down business value. The following business components should receive particular attention when taking steps to maximize a sale price at the exit.
- How Do You Spend Your Time? Nothing devalues a business more than excessive dependence on a departing owner. If you are very active in day-to-day operations, you are acting as an employee and not as an owner. If you are making the daily tactical and managerial operational decisions, you are making the business over-dependent on you, and potential buyers will offer less for your business than if it ran smoothly without your active presence.
Business owners who create value-driven businesses proactively train managers and employees to run the day-to-day operations. Key employees make operational decisions. Business owners should lift their heads away from the functional aspects of the business and focus on strategic matters.
Employees think functionally and tactically, while owners think strategically.
If you are not making this your mantra, you are prolonging the business’s status as an owner-dependent business, which will cause it to be devalued in the acquisition marketplace.
- How Attractive is Your Management Team to a Buyer? Notice the emphasis on the words “to a buyer.” A management team can have tremendous value to the current owner and yet have far less value in the eyes of potential buyers. Can your employees completely run all the functional aspects of your business without you? Can you take a vacation for an entire month, knowing that all business operations will proceed just fine without you? Are your contracts with customers and suppliers contingent and fully reliant on your personal relationships? Where does employee loyalty reside: with the business or with you personally? Will a buyer expect to see the management team walk out the door shortly after your exit?
Your strategic goal is to develop a management team that can run all functional and operational aspects of the business completely independent of you, and who are loyal to the business beyond your presence. To maximize market value, a business owner must provide the training, the structure and the processes to accomplish this. Furthermore, before, during and after the deal-making process, you will need to provide sufficient incentives for the management team to want to continue working in the business after you exit the business, or else again, your sale price will be dinged.
- Are Your Customers Enhancing or Detracting from Business Value?
Are your customers sufficiently financially secure that they will continue to buy from your business for the foreseeable future? How soon after providing products and services do your customers pay you? How old is the average of your accounts receivable? What are the payment terms with your largest customers? Does any one customer account for more than 20% of your total sales? Have you reviewed the profitability of each account? A customer that buys in high volume, but low margin and has very slow payment terms may be very unattractive to potential buyers of your business.
Reviewing the profitability and payment terms of your customers is an area to focus your attention. Furthermore, having any one customer account for a disproportionately high percentage of sales is not a good sign in the eyes of a buyer. Remedying these weaknesses in your customer base is not an overnight process, but it can help guide strategic focus to prepare for a successful sale in advance. Shifting your customer base and attracting higher-quality customers takes time. Sudden, short-term changes are not as compelling to a buyer as a long-term track record of sustained improvement.
- Where Is Your Company Playbook? Notice we did not say “employee handbook.” We said “company playbook” because a business that cannot document each of its functional operations as repeatable processes has a weak enterprise value as compared to businesses that do have this capability. Business operations need to be transferrable to have value to a buyer — they can’t disappear when you do.
Your company playbook will list all operating procedures that employees follow for each functional area of the business. The processes and procedures in the playbook are what employees do when they do their job effectively and consistently. It assures consistent quality, and most importantly, assures a buyer that the company will function well independently of the owners. This is a business that is exit-ready at all times. This is a business that has higher transferable value than one highly reliant on the departing owner.
- Where Is the Next Generation?
Many business owners look at the management team members’ depth of experience as a source of pride and defense of business value. There is some truth to that, but that is not the complete story from a buyer’s perspective.
First, based on the age of senior management team members, a buyer may be concerned that the management team is sufficiently close to retirement age, and they may have no interest in working for the new owner. Second, an exclusively senior management team may be a sign that the business is unattractive to younger, future managers. And lastly, the company culture may be such that the business is unattractive to younger executives and may be unsuccessful in retaining and developing future leaders. This weakness in company culture and failure of employee development may cause buyers to pay a discounted price. In order to maximize sale price, it is important to have quality people throughout the management function of the business, with young leadership ability included in the equation.
- What’s the Buzz on Your Brand?
Well-regarded tradenames are often a material portion of the intangible value of a successful business sale. When considering your brand, think about the buzz around your company in the marketplace. Why do customers buy your product or services? Do they buy because your company delivers superior products or services, which result in high-margin sales? Or do they buy your products because they are “cheap,” and they regard your company as the low-cost provider? Do you have to continually chase greater sales volume due to low-margin products or services? Are customers talking about your products and creating a “buzz” about your products, or is there a lack of customer loyalty?
Are people talking about your company? Is it regarded as a socially conscious company, with a great reputation and a strong social media presence? Would potential employees rather work for your business than your direct competitor? Any business or brand that has a “buzz” will drive greater exit value in the eyes of a buyer. How does your strategic plan address building or enhancing your company’s “buzz”? Focusing on brand quality and supportable metrics will help maximize sale price in an exit. All else equal, buyers want to acquire strong brands.
- Where Is Your Exit Plan?
The single easiest way to sabotage your company’s value is to wait and do nothing. Procrastination is the poison in every exit plan. Early-stage exit planning helps elevate the strategic focus of the business and maximize efforts toward value-enhancing activities. It is a strategic game-changer that will filter into ongoing tactics and day-to-day operations positively, with the right focus. If you, as the owner, focus on making your business exit-ready now, it will have far greater value no matter when or why you exit — even if personal or market forces arise outside of the ideal timeline.
- What Is Your Personal Plan?
The personal plan is the most overlooked aspect of exit planning. In order to be successful in life beyond your term as a business owner, you need to develop a post-exit plan for your life without the business. Business owners who have well-thought-out post-exit life plans are excited about what they will do next, and they have tested the waters regarding their post-exit plans. These are business owners who are more likely to have a business with higher exit value. The reason is that when owners have solid, realistic plans for their post-exit life, they are more proactive about preparing their business for exit. The harmony of the business and life plan helps ensure a smooth transition will be well-thought-out, well-prepared and strategically aligned. The harmony is also more likely to result in peace of mind at the time of sale, as all aspects of the business owner’s financial plan will have been well-considered and proactively addressed.
Business owners who are emotionally unprepared to let go of their business are more likely not to prepare their business for exit. Owners who have not planned how they will replace the social connections, the challenges, the intellectual stimulation, the emotional excitement and the sense of purpose that their business provides will not want to think about the exit. Hence, they are far less likely to prepare for their exit, and they will often exit from an undervalued company. Prepare both your post-exit life plan and your business for exit readiness for the maximum impact of the overall process on your success and personal peace of mind. Your business will have higher value and you will have a more fulfilling post-exit life.
Make Your Move. Change the Outcome.
If you are not actively engaged in exit planning for your business, it is fairly certain that your business is currently undervalued, and it will remain undervalued until your strategic focus changes. This means forces out of your control are more likely to result in less-successful outcomes both for business and personal wellbeing.
Take a hard look at your business with a new paradigm: See your business through buyers’ eyes, and actively engage in making your business exit ready at all times. This will ensure that your business is always moving toward its highest potential value. The earlier you start, the more likely you will have success in the process. This is effective exit planning.
Discover More Exit Planning and Value Acceleration Insights.
This article is No. 35 in the Business Ownership Special Series (B.O.S.S.), an ongoing cycle of informational guides from BPM, designed for business owners who are proactively seeking guidance from experts on how to implement value acceleration in their business, and delivered monthly straight to their inbox. For more insights, download our e-book, “Value-Focused Business Planning,” and check out the rest of our B.O.S.S. articles.