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.
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The USA publishes it’s GDP growth statistics one month after the end of a quarter, with adjustments over the next few months. China puts out the number on the last day of each quarter, and never updates it. As Goolsbee says, that causes economists to wonder, “Why do they wait so long?”