For every business owner, there inevitably comes a point at which they can’t, or no longer want to, run their company anymore. Owners who early on start laying the groundwork for that transition put themselves in a position to maximize their company’s value and set themselves up for a fulfilling post-sale life.
“The sooner you think about your exit, the more options you’ll have — for yourself and the business — when the time comes,” says Scott McRill, shareholder, Transaction Advisory Services, Clark Schaefer Hackett.
He says business owners who are prepared can pass the company on to family, move operational responsibilities to key employees, or sell the business to a third party or to employees.
“But early planning is critical,” he says. “Business owners who don’t plan could find themselves in a situation where they need to sell but have limited options, which negatively affects the sale price.”
Smart Business spoke with McRill about what owners can do to prepare their business, and themselves, for a transition.
How far ahead of a transaction should preparations for a sale begin?
The typical time frame is at least two to three years before the planned sale date. That should give an owner enough runway to make the operational improvements necessary to maximize the business’s value.
To prepare for the transaction, owners should get a third-party view of the business’s financial situation. Having an accounting firm involved with two to three years of audited or at least reviewed financial statements helps ensure the numbers are clean, reconciled and presented in accordance with GAAP ahead of the transaction process.
Often overlooked during preparation is the state of the management team. Many buyers expect that a capable management team is in place to run the business post-sale and will also expect the owner to stay on for a short transition period. But if a capable team is not in place, the buyer may expect the owner to stay on board during a much longer transition period.
Who should business owners engage to help them sell their business?
Owners tend to underestimate the amount of time and attention that’s needed to complete a transaction. The process — from marketing to close — could take six months to a year. It’s often a job in itself.
A business owner can lean on the team — accountant, attorney, investment banker or business broker — for much of the sale preparation. That’s important because if the company’s performance deteriorates during a sale, it can erode business value in a transaction.
Owners should also consider seeking the advice of a wealth adviser to ensure the proceeds the owner gets from the sale can be applied to accomplish whatever goals he or she has in life after business ownership.
What mistakes do business owners tend to make once they decide they’re going to sell?
Owners need to consider the emotional side of the equation — they often don’t take enough time to evaluate whether they’re personally ready to sell their business. Owners need to think through what will occupy their time post transaction.
That can be difficult, as many entrepreneurs have devoted tremendous energy and time to their business and haven’t pursued a lot of outside interests. Then, the day after a sale, they have no idea what to do with themselves, which can lead to seller’s remorse.
The ‘life-after’ plan is a living, breathing analysis of post-ownership life. It’s something that should be in the back of an owner’s mind during the earlier, high-growth stages of a company. It’s common to see owners formalize that plan a couple years ahead of a transaction, though planning four to five years ahead of a sale would be better.
As part of this plan, owners need to consider the lifestyle they want to live post-ownership. From that, they can determine what cash flow will be needed, which will help determine how much they need to sell the business for vs. what they might want to sell the business for. This step is important to the negotiation process. Without it, owners can be disappointed in a valuation without realizing that it’s more than sufficient to achieve their objectives.
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