By: Jacqueline Roth, CBI, Principal, Walden Businesses, Inc.
They say life is decided in a matter of moments and nowhere could that be more true than when selling a small business. Do it right and your client’s baby could be worth a fortune. Fail to plan, and there could be nothing left.
For those of you with business owner clients, strategic planning is critical—begin with a discussion about exit strategy planning. You see, it’s not enough to build a business worth a fortune; you have to make sure an exit strategy is in place, a way to get the money back out. In most small businesses, the majority of the owner’s net worth is tied up in the business. Without proper planning and strategy, the business may not be sellable – ultimately compromising retirement. Here are the primary exit strategies available to most business owners:
Family Succession. Selling to family makes good on that offhand promise made 30 years ago, “Someday, son/daughter, all this will be yours.” Grooming the next generation to lead the company for future decades is the most natural transition, but can also be the most emotionally charged and proper succession planning is often ignored. Hesitation to relinquish control, sibling rivalry, lack of management skills or interest by the upcoming generation of a family business can be unexpected challenges for the founding parents. No sooner than you leave the family business to the kids, it’s likely they’ll end up fighting over who got the larger share, who does or doesn’t deserve the ownership they got, and who gets the final word. This can put undue strain on a family, that otherwise, had good intentions. If your client decides to go this route, they have a lot of planning to do before getting out and possibly a few uncomfortable conversations with children.
The Liquidation. Running a successful business is hard work. Entrepreneurs tend to wear a lot of hats in their business and serve many key roles in the company – salesperson, accountant, marketing director, operations manager, janitor, and let’s not forget CEO. As a result, business owners can get burned out or have poor work-life balance. At some point, some decide that enough is enough. No one goes into business with the goal of liquidating it someday, but it happens all the time. Liquidating the hard assets and paying off creditors is certainly a quick and easy solution. However, that tends to leave a lot on the table. In businesses that have decades of history, and may even be second or third generation family-run businesses, that legacy reputation is valuable. Liquidating completely ignores Goodwill items like client lists, your reputation, and your business relationships and should be considered only as a last resort.
The Acquisition. Acquisition is one of the most common exit strategies, but also one of the most complex. When deciding to sell a privately-held business, an owner should work with a M&A professional who is skilled at identifying qualified buyers, understands the current market as well as recent transactions that can affect the business’ value. Creating an open auction for a business can yield the highest offer price – potentially netting your client thousands more at closing. Attracting strategic or synergistic buyers, who will benefit the most from owning the combined company, should be the initial prospect list. Marketing the business to competitors is usually only slightly better than liquidating – if there is considerable overlap in equipment and systems, what’s left is not much more than a customer list and supplier relationships, often leaving your client’s employees in the unemployment line. Confidentiality is critical with this exit option; one misstep and competitors may sabotage future contracts and steal customers – putting your client out of business before they realize what hit them.
The IPO. I’ve saved IPOs for last, because they’re sexy, they’re flashy, and they get all the press. Too bad they make the lottery look good by comparison. There are millions of companies in the US, and only about 7,000 of those are public. And many public companies weren’t even founded by entrepreneurs but rather were spun out from existing companies. Heck, AT&T and its spin-offs are almost a significant fraction of the listed exchanges!
It’s never too early or too late to begin planning. An exit strategy should be the beginning, not the end of your business plan. Additional information can be found at www.waldenbus.com. For a no-obligation consultation, call (919) 615-2723 or email [email protected].
Jacqui Roth is a Certified Business Intermediary with Walden Businesses, Inc. in Raleigh. Walden is the leading M&A firm in the Southeast, representing business owners and qualified buyers of small businesses and lower-middle market companies up to $50MM in revenues. Walden guides shareholders and management teams through the sale process, bringing over 120 years of combined experience and judgment to maximize value and facilitate seamless transitions of ownership. For a no-obligation consultation, contact us today at [email protected] or visit www.waldenbus.com.