“There’s nothing worse than meeting the right person at the wrong time” — Anon
If this thought has crossed your mind “Why bother to plan for my business exit when I can’t sell it now or anytime soon?”, then consider the case of business owner Ron Lemond.
Ron’s Golden Opportunity
Ron Lemond’s engineering business had grown steadily until the last few years. Although revenues had flattened, Ron maintained profitability by reducing overhead and working more hours.
This was Ron’s situation when a would-be buyer approached. At age 55, Ron hadn’t actively considered selling his business but was beginning to think that life after work might have something to offer. His business wasn’t providing as much fun as his other activities, especially since business growth (and, more importantly, profitability) had slowed for the last two years.
Ron scheduled an hour to talk to that interested buyer, and in 60 minutes, his eyes were opened, and his priorities turned upside-down.
The buyer, a large national company seeking to establish a presence in Ron’s community, wanted, like most buyers, to acquire a business that could grow with little other than financial support and the synergies it brought to all of its acquisitions.
The Missing Drivers
This meant the buyer sought companies with a number of characteristics that I will call Value Drivers. Some important Value Drivers are: –
- A capable management team (apart from the owner). Ron’s buyer (again, like most) did not have its own management team to insert into the business. Ron had not attracted or retained solid management, nor had he created a plan to do so.
- Strong and increasing cash flow. Unfortunately, Ron’s company had been experiencing declining cash flow.
- Sustainable and comprehensive systems throughout the organization (from human resources to marketing and sales to work flow). At best, Ron’s business was a hodgepodge of stand-alone, as-needed systems created over time to respond to particular emergencies, and positioned Ron at all decision points.
- A plan to grow the business focused on enhancing a company’s unique position in the marketplace. Ron had never created a written plan, let alone identified or clarified his company’s competitive advantage.
When Ron failed to satisfy the buyer’s concerns about his company’s Value Drivers, he understood that his company’s value, management systems and growth all depended on his active and continued presence in the business.
While Ron had naively steeled himself for a lowball offer, the buyer instead disappeared.
In today’s financial and economic climate, if a buyer is willing to acquire a company that isn’t a turnkey operation, it will not do so without the owner’s continued involvement. Buyers do not have the time, the risk tolerance or the in-house talent to correct deficiencies.
Don’t Be An Ostrich
While too many owners of outwardly successful companies share Ron’s fate, the heart of the problem lies in their failure/inability to do anything about it.
How long will it take you to avoid Ron’s fate and prepare for the sale of your company for top dollar?
I don’t know, but I do know that it’s a lot easier to bury your head in the sand and go about working in the business than it is to devote the time, energy, and resources to prepare for your transition out of your business.
Yesterday Was The Time To Start
If you spend your time passively waiting for improvement in the M&A market, or for a rising economic tide to lift your boat, then good luck to you if that occurs. But it also may not.
Worse still, if the market lifts or the economy improves, and you haven’t actively used your time to create Value Drivers to make your company attractive to buyers, your business will probably still won’t sell, and if it does, it won’t sell at a premium compared to other companies in your industry.
Creating Value Drivers takes time, and time is something buyers are not willing to take.
For Ron and most business owners, it takes at least three years, and often as many as ten, to execute a Business Transition Plan to make a business saleable.
Factors that lengthen the Business Transition planning process include:
- Unforeseen threats posed by downturns in the economy, your health or in the composition of your management team.
- An owner’s overly optimistic assessment of how rapidly the company and its employees can adapt and embrace change.
- The likelihood that you are more motivated than your employees to work toward your successful exit.
- The probability that everyday business crises will divert your focus from long-range planning.
Given that it takes time not only to create the plan but also to implement and achieve measurable results, is it not time for you to start planning the most important financial event of your life – your transition out from your business?
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact a lawyer or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Master Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice you need.
Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.
