Exit Planning Tools for Business Owners

business brokerage

Exiting a Small Business #2 – Selling to a Third Party

by

“In our last episode,” (I’ve always wanted to say that) we discussed the exit paths that are not usually available when exiting a small business. Those are ESOP, Private Equity, and Strategic Acquisition. Now let’s talk about what you can do.

The Realities of Selling to a Third Party

Multiple surveys over the last decade all show the same result. About 85% of small business (5 to 20 employees) owners say that their exit plan is to sell to a third party.

Let’s do the math. There are currently over 3,000,000 small business owners over 55 years old in the USA. We can assume that by the time the youngest is 75, virtually all will have exited their businesses. That means an average of 150,000 businesses a year will transfer or close.

According to the International Business Brokers Association (IBBA), their intermediaries execute about 40,000 transactions a year. It should be a bull market for intermediaries (although not for sellers.) Let’s assign them 50,000 transactions annually.

That leaves 100,000 small businesses a year who will have to find methods of transfer other than through a business broker.

Broker Alternatives

Business Brokers can be cynical about their clients. They commonly complain that the best businesses sell through their accountants, bankers, attorneys, or word of mouth. Their listings consist mostly of the “Dismal Ds,” (Death, Disease, Disaster, Divorce, Declining sales, Dissention among partners, Disinterest, etc.) While this is an exaggeration, it’s true that the better shape your business is in, the more likely it is to sell easily.

If you’ve prepared your business well, understand your potential buyer, and are personally ready to move on, your best bet for selling is probably your business network.

Being Ready

Brokers sell about 20% of the businesses they list. Again, that number has been consistent for decades. According to the Pepperdine Private Capital Markets Report, the number one reason for an intermediary’s failure to sell a business is “unreasonable expectations of value” by the seller.

Again, that may be self-serving, but brokers are paid for success. None would sneer at a higher valuation if he or she could get it. A realistic expectation of value is the first and most important step in a successful sale.

Some brokers will take a listing at any price. They believe that eventually, the market reaction will drive their clients to a reality check. The problem with that approach is that the first buyers, and possibly the most qualified, are driven off by an unreasonable price at the outset. They don’t come back later.

If you plan on selling to a third party, you will be best served by being prepared before you talk to a broker. There are a lot more areas to cover, and this series of articles is just a high-level view of your options. For a more complete approach, you may want to check out my book 11 Things You Absolutely Need to Know about Selling Your Business. The EBook is free for Kindle Unlimited subscribers.

Next up, selling to family members.

Manage Activities; Lead for Results

by

A few weeks ago I posted a comment in the Business Journals Leadership Trust Forum about a life lesson I learned. The difference between effort and outcomes – Manage Activities; Lead for Results.

They reached out and asked if I could expand my comments a bit. Those of you who know me won’t find it surprising that it grew into an article.

You can find it here. I hope you enjoy it. Remember, lead for results.

 
Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies

Video on Preparing for Your Exit Plan

by

I contributed this video interview about preparing for your exit plan to SuccessionMatching.com for their recent Summit.

It is about preparing what you need before starting your exit planning process. Succession Matching has made it available for free for another week. (requires creating a user name and password)

 

I hope that you enjoy it.

Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies

Four Basics of Exit Planning 3: Know Your Buyer

by

Know your buyer? Your initial reaction to this title may be “How can I know my buyer? I haven’t even decided to sell yet!”

Nonetheless, understanding the type of buyer that your company will attract is vital. More importantly, gaining that understanding long before you go to market will impact many decisions about how to run your business between now and when you start to actively market the company for sale.

The classes of buyers are not interchangeable. I once worked with the owner of a subcontracting company. He told me “I want to find a strategic buyer. I know they pay higher multiples than anyone else.”

That’s nice in concept, but Strategic Buyers make strategic acquisitions. His business was only as good as its next bid. He had no proprietary systems, no products, no long-term customers and no contracts besides the current jobs. Strategic buyers pay for strategic differentiation. He was unhappy that I didn’t classify his self-defined “great reputation in town” as a differentiator.

Other Classes of Buyers

Your business will determine what types of buyers you should seek, how your earnings will be viewed, and the multiple of earnings you can expect.

Main Street is the generally accepted term for businesses that sell for less than $3,000,000. Entrepreneurial Buyers are most commonly an individual or partnership. Downsized executives and entrepreneurs who have sold a previous business make up a large percentage of the buyer population for these companies. These transactions are usually handled privately, or through a business broker who advertises them on the Internet.

Cash flow for these businesses is called Seller’s Discretionary Earnings (SDE), and includes all the perks of ownership (wife’s car, no-show child employment and the like.) Anything that could be applied to a debt payment qualifies. For most Main Street buyers, their ability to service loans for the purchase usually tops out around 3 times SDE.

Mid-market companies sell for between $3,000,000 and $100,000,000. Financial Buyers include private equity firms and family offices. These buyers usually seek acquisitions where the cash flow is in excess of $1,000,000 a year.

Many lower Mid-market sellers are confused by the cash flow calculations. Financial Buyers’ cash flow measure is EBITDA (Earnings Before Interest Taxes Depreciation and Amortization.) Some sellers try to include the side benefits their company pays for in EBITDA. Financial Buyers assume that any benefits you have, a replacement manager will have as well, and they will ignore many of the SDE inclusions.

Private equity and Family Offices purchase businesses that are likely to produce a predictable return. Because they have investors (or wealthy family members) to please, their purchase prices are usually in the range of 4 to 5 times EBITDA, although the recent financial markets have driven that into the 6x territory for acquisitions over $20,000,000.

The Mid-market is also where sales are made to customers, vendors or competitors. Handling these transactions requires special care with confidential information. Since buyer and seller usually know each other, a broker-type intermediary is less necessary. Many times a transaction attorney or accounting firm can handle the negotiations.

The Neutral Zone

Exit Planners provide special value to companies in the “Neutral Zone.” I define that as too small to be big, and too big to be small. Their EBITDA is healthy (usually $500,000 or more after owner compensation) but below the $1,000,000+ that the Financial Buyers seek. Yet at that level, few Entrepreneurial Buyers can handle the purchase price.

There are many options still available to a Neutral Zone company. You can choose a growth strategy to enter the realm of Financial Buyers. A Leveraged Buy Out (LBO) by experienced employees is likely to attract the interest of a lender. An Employee Stock Ownership Plan (ESOP) is a very attractive alternative in the right circumstances.

In all cases, a good planning runway will help you to know your buyer. Then you can position the business with control over the outcome you seek.

A short video on classes of buyers and the multiples they pay, along with a free calculator to determine your SDE or EBITDA are both available on our website of free tools for owners, Your Exit Map.

Exit Planning: Ripples and Ripples.

by

Every stone thrown into a pond creates ripples. Every advance in technology does the same.

The late Stephen Hawking said that we were progressing too quickly. Along with other technology and science notables, he argued for a slowing down of development in Artificial Intelligence (AI).

Most current “AI” is actually machine learning. As computing speed increases exponentially, the ability of a computer to calculate, test hypotheses and weigh varying outcomes increases as well. Computers can now beat the best humans at every game ever invented. From Chess to Go, and from Texas Hold ‘Em to Ms. Pac Man, binary geniuses are sorting through billions of possibilities, and even being credited with rudimentary “intuition.”

But Machine Learning isn’t intelligence. A computer can sort through every chess move possible, but has trouble deciding what to do when a person with a bicycle steps out between two cars.  What if the correct answer is to swerve into oncoming traffic? A computer can’t make that call.

Robots on the Roads

That doesn’t mean you can be smug about what is coming. Take autonomous trucks. Clearly they aren’t smart enough (yet) to negotiate narrow city streets, bumper to bumper traffic jams or unload oddly-shaped cargo. That would require some real intelligence. But they don’t have to. They can just take care of the 80% of the easy stuff, long haul driving. Automatically driving great distances on relatively clear roads is completely feasible right now.

What if autonomous trucks were limited to driving from 8:00 PM to 6:00 AM? A few lanes on interstate highways could easily be electronically tagged for higher speed,  and robot-truck only use. They can follow more closely, having both quicker reaction times and the connected ability to “see” what is happening further ahead. A truck that doesn’t have to stop for food or sleep could cover a lot of ground in ten hours of high speed driving. Daytimes would be reserved for human-operated local delivery.

Ripples in the Pond.

How much would that affect trucking and other industries?

There would be far fewer driver jobs, although most drivers would likely be closer to home.

Traffic would be greatly lessened during the day. Good, you say? Tell that to the paving contractors, sign companies, crane operators, orange cone manufacturers, lighting and signal electricians or bridge builders. It could be decades before we have to expand highway capacity again. With the speed of technological advancement, decades could translate into “never.”

Is this good news for truck stops, all night diners, and budget motels? Heavy equipment manufacturers? Civil engineering companies? Public sector spending on highway construction is almost $100 billion every year. For comparison, that’s about the size of the whole digital/streaming TV and video industry.

Returning to the trucking industry itself, I doubt that trucks will remain as “one size fits all.”  Current testing is on models than can be autonomous, but also accommodate a human driver. The latter will go away. Robotic models can greatly reduce size, be more aerodynamic, and weigh less. They would also be more fuel efficient, and could be electric.

Uh oh. Trucks consume almost a quarter of all the petroleum products used in the U.S. That starts the conversation about the impact on oil companies, the fuel distribution network, gas dispenser manufacturers, drillers, pipeline construction, tank fabrication and installation…the ripples continue.

As an Exit Planner, I’m predisposed to look down the road, and to consider the risk in every transfer. Not all scenarios are doom and gloom, and many new industries will be born, most of which I can’t imagine.

I guess my message is that none of us should be smug about the future. If the financial community sees a threat on the horizon, expect lenders and investors to run the other way, fast. We watch the stones. They watch the ripples.