Exit Planning Tools for Business Owners

Exit Strategies

The Right Price for Your Business

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“If someone offered me the right price, I’d sell in a minute!” Exit planners and business brokers hear it all the time. “Anything is for sale if the price is right!”

What is the “right” price? Of course, you can fantasize about a windfall from a buyer who has far more money than brains. Some of the fast-talking “business brokers” (the ones who get more revenue from preparing offering books than actually selling companies), will pitch their secret list of buyers in Europe and Asia who routinely overpay for businesses.

In case you didn’t know, the largest advisory firms in Europe and Asia are the same ones we have here. The same accountants, the same attorneys, the same investment bankers and the same consultants. It’s unlikely that they give their wealthy overseas clients lesser quality advice than the ones in North America.

Barring purchase by a lunatic, your business is likely to be priced around Fair Market Value; the arms-length amount that an independent buyer will pay an independent seller.

Beauty is in the Eye of the Beholder

You are the seller, and your company is what it is. Buyers, however, come in a variety of sizes and flavors. Understanding why companies have different values to differing buyers is critical if you plan to maximize your proceeds.

Here is a 2 1/2 -minute video on valuation from our website of free tools for business owners at www.YourExitMap.com.

These are the typical ranges for “fair market value.”

If you are earning less than $500,000 in total salary, profits and benefits from the business, your likely price is between 2.5 and 3.5 times the SDE (Seller’s Discretionary Earnings.) These are “Main Street” businesses; typically sold to individuals.

Once you exceed $1,000,000 in Earnings before Interest, Taxes, Depreciation and Amortization, or EBITDA (but not counting your personal salary and benefits) you are a target for professional investors. These include private equity groups and family offices. In this market, valuations between 4 and 6 times earnings are common. If your EBITDA is over $2,000,000 it could be substantially higher.

Strategic and industry buyers (who may be the same) could pay more, but those transactions are very specific to the situation. In simple terms, the right price is whatever you can get. If the acquirer has a plan to plug your business into an existing customer base and grow it substantially, earnings often become a secondary issue.

The Neutral Zone

The “neutral zone” contains those companies who earn more than $500,000 (SDE) but generate less than $1,000,000 EBITDA. This is a fairly broad range.

Let’s use an illustration. An owner takes a $400,000 salary along with another $250,000 in benefits, and shows a pre-tax profit of $700,000. Clearly that is a healthy small business. In the “Main Street” market the company could value at between $4 and $5 million.

An individual buyer would need at least 25% down ($1,000,000 cash) plus working capital, and be able to guarantee loan payments of about $500,000 a year. That’s well beyond the range of most individuals.

Yet unless this business has a unique product or intellectual property, it is likely of no interest to professional, industry or strategic buyers.

Many of these companies are choosing a staged sale to their management teams. Others choose to kick growth into a higher gear in order to reach the next stratum of buyers and valuation. Either approach will usually take at least five years.

Controlling the Right Price

Some owners are choosing both approaches. They use ownership as a management incentive to achieve growth targets. If the company makes the leap into a buyer market with higher valuations, both the owner and the management team win.

If the company doesn’t attract the target buyers, the owner still has a solid exit strategy from a more valuable company. Getting the right price requires the right plan.

“Read” my new book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It was ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here. Thanks!

Why GenXers Won’t Buy Your Business

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There are six reasons why GenXers won’t buy your business.

Last week I presented a webinar for the Exit Planning Institute entitled “The Perfect Storm.” It looks at six factors impacting the desire and the ability of Generation X buyers to acquire a Baby Boomer business.

The first three, demographic, psychographic and sociographic, are macro trends that make Xer’s unlikely to buy any business that requires capital or more than full-time commitment. .

The last three factors, Regulation, Disintermediation and Entitlements, describe why all businesses are harder to sell today than they were even ten years ago.

The presentation is a bit long (38 minutes), and the quality isn’t perfect.(My apologies for the “dings” when viewers check in. That wasn’t controllable on my end.) None the less, if you are an advisor to owners, or an owner who is planning to sell, you might want to watch this data-based approach to the market forces you’ll deal with.

“Read” my new book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It was ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here. Thanks!

 

After the Exit; “Nothing Will Change”

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“Nothing will change.” It is almost de rigueur for an acquirer to include that in his or her opening comments to the incumbent staff of a just-purchased business. Sometimes it is the seller’s attempt at making folks feel better. “Don’t worry. They promised me that nothing will change.”

In the moment, it seems like a calming thing to say, a confidence builder for the employees who have just been informed that they have a new boss. In the long run, it can cause more problems than it solves.

Everything Changes

In any company, change is ongoing. Employees are asked to learn additional skills. Systems are upgraded. Procedures are rewritten. People are promoted or terminated. Customers leave, or (hopefully) big new accounts with new requirements are landed.

No experienced business owner in his or her right mind would ever promise employees that “Nothing will change.” Change is part of the landscape, and adjusting to it is inherent in keeping the business growing and relevant. Employees accept that fact unconsciously, because it’s always been part of the landscape.

Of course, when an acquirer says “Nothing will change,” he means today. There will be new procedures. New reporting relationships will have to be worked through. Software will be modified, or even discarded for the acquiring company’s preferred systems. And eventually, some employees will be promoted or terminated based on their ability to accommodate those inevitable changes.

“Nothing will change” is a license for employee dissatisfaction. They have to learn a new telephone system. (“He lied. This is a big change.”) All invoicing will be done through the central office. (“She lied. This is a massive change.”) Job descriptions and incentives will be adjusted to match the parent company’s. (“He lied. Everything is changing!”)

Demystify Change

The appropriate soother for acquisition anxiety is the truth. “I know this is a big change. You’ve faced great changes in this company before (get some examples from the seller) and your ability to adjust and succeed is what makes us so excited to be teaming up. We’ll take things slowly to start, and work with you so that our integration will be as painless as possible.”

There are no magic words that can completely eliminate employee concern. Dealing with it by promising something that isn’t true is just incurring a long-term cost for a very short-term benefit.

 

The Unsellable Company

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What does an unsellable company look like? Some business brokers will assert that there is a buyer for any business. That may be true, but historically four out of every five small businesses listed for sale fail to sell.

In this post I am specifically discussing profitable Main Street businesses. That is loosely defined as those valued at under $3,000,000. “Small” doesn’t necessarily refer to size. Some low margin businesses, such as those in distribution of commodity products, could have revenue well into eight figures and still be not command a $3 million valuation.

Others, like those with proprietary software, might have a few million dollars in revenue and be snapped up by a strategic buyer for an eight figure price.

The buyers for most Main Street businesses are individuals who are seeking a livelihood. They usually have never owned a business, and are betting their life savings on the venture. It’s not surprising that they are nervous.

The price ceiling on defining a Main Street company is based on the projected ownership. Simply put, if a business’ principle purpose is to provide an owner (or perhaps a few owners) with a decent standard of living, the ceiling on valuation is based on what the company’s cash flow can support in owner salary, debt service and ROI on the down payment.

To see if your presumed value supports these three requirements, try the Valuation Sanity Check at http://yourexitmap.com/exit-planning-valuation-sanity-check/.

Just because your cash flow justifies your price however, doesn’t mean your company is saleable (or as my Canadian friend John Warrillow writes it in Built to Sell, sellable.) There are still a number of reasons why a solidly profitable business may not find a buyer.

Owner Centricity

Simply put, the whole business revolves around you.  A buyer’s due diligence keeps running into you at the end of every question. How do you do this? (Ask Bob.) Who are your most important customers? (Ask Bob.) What discounts are available from your suppliers? (Ask Bob.) You get the picture.

Even if you have excellent processes, duplicable talents and widespread delegation, an owner who personally holds the professional license needed to legally operate presents a similar issue for a buyer.

Customer Concentration

Some small businesses are very good at what they do, but luck always plays a part. If you’ve grown by depending on one customer for over 50% or your business, or a handful of customers for 80%, expect individual buyers to shy away.

Long term relationships are great, but if they aren’t documented don’t expect them to carry much weight in a valuation. It’s one thing to be proud of doing business on a handshake. It’s another to bet your life savings on one.

Uncertain Revenues or Margins

If you have to explain your tax returns with “We have some good years and some bad years,” you will have a problem attracting buyers. They don’t have your confidence that a bad year will be followed by a good one. If they are committing their retirement savings to the purchase (which is often the case) they are worried about having the financial stamina to withstand a dip in sales.

Similarly, it you are regularly buttressing your revenues with cuts in margin through big discounts or volume deals, it will be perceived by a prospective buyer as regularly having to “save” the business.

You may have steadily increasing revenues and profits, but companies that bid, or have to submit proposals for each job, strike fear into the hearts of inexperienced buyers. They have nightmares about failing to win another job from the day they take over.

Contracts help with this, but they often aren’t enough. I worked with one buyer whose offer was based on the revenue stream from each existing contract until it expired. He wanted to be made whole for the purchase price even if he proved unable to ever land another big customer.

The Unsellable Company

If you recognize your business as having any of these traits, you have three choices when it comes to exit planning.

You can sell the company to employees who understand the constraints of the business and are comfortable with them. You can list the company for sale anyway, and hope that yours is among the 20% of enterprises for whom the right buyer can be found.

Finally, you can implement a plan to eliminate the obstacles to a sale.

Exit Planning in a New Political Environment

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What does a new political environment mean for business owners who are planning to transition their businesses? Should you accelerate your plans, or slow them down?

As I’ve said many times in this space and elsewhere, the biggest single factor in successfully selling a company is the current condition of the financial markets. Since the Great Recession, the Federal Reserve has poured new cash into the system at very low interest rates. This “cheap money” has trickled down to fund a wave of leveraged buyouts by financial professionals seeking a better return than that from more traditional investments.

This wave of cash enables some 7,000 private equity groups (PEGs) to seek targets in almost every industry. Those targets, however, are typically among the 20,000 or so privately held companies with over $1,000,000 in pre-tax profit.

That leaves out some 9 million employers on Main Street (those that sell for less than $3,000,000.) Of those, about 5 million are owned by Baby Boomers who are, or should be, thinking about life after business ownership.

Most of the owners I talk to are at a loss to predict the climate of the next few years. They hope that a pro-business administration will reduce bureaucracy and pull back some of the regulatory burden on business owners. On the other hand, they are concerned that trade wars, rescission of treaties or diplomatic snafus will drive the US, or the world, into another economic trough.

A very few claim that they know exactly what President Trump and the Republican Congress will do. In the words of Prussian General Helmut von Moltke, “No battle plan survives contact with the enemy.” People may think they know what is coming, but it would be foolish to bet the ranch on any single outcome.

What does this mean for exiting business owners? At the risk of sounding too pat, it means exit planning is more important now than ever before.

Why Start Exit Planning Now?

Here are some reasons why an exit plan is valuable in uncertain times:

  • If your planned exit is more than five years from now, the landscape will likely change again before you transition. A plan will give you the tools to track key components of a successful exit, and improve your ability to respond to changes.
  • If your intention is to preserve the legacy of your company by selling it to employees or family members, starting the transfer now can put you in a position to accelerate or delay the final transfer according to current conditions.
  • If the stated intention of the new administration (a return to 4% GDP growth) is successful, a plan to maximize your value to a third-party buyer will leverage higher pricing multiples.
  • If the economy winds up in the tank, a plan is only a plan. It can always be put on hold until conditions improve.

An exit plan is, by definition, a strategic plan with the addition of a completion date. Some owners fear that by stating a deadline, they are committing to it regardless of circumstances. Of course that isn’t true.

Planning your exit and actually exiting are two different activities. It only makes sense that the political environment should be one of the factors that affect your final decision.

Would you like free excerpt from my new book Your Exit Map: Navigating the Boomer Bust?

Just register here. We’ll send you short pieces every few weeks until its publication in the Spring.