By Mark Abell & David Stahl
According to the NFIB Business Optimism Index, business owner optimism in 2020 remains well above the long-term average, as owners expect to see another year of sales and earnings growth. Combined with financing readily available at low interest rates, this continues to be a great time to sell a well-run company. Millions of Baby Boomer business owners want to sell to fund their retirement: The Exit Planning Institute (EPI) forecasts 4.5 million firms valued at more than $10 trillion will be put up for sale in the coming 10 years as Boomers try to fund their golden years. However, only the best businesses — fewer than 30% — will sell, EPI says. That’s because many owners aren’t prepared and often make these 4 common mistakes that complicate an exit from their business on attractive terms.
Mistake No. 1: Business Owner/Founder is too involved in the business
Many businesses start with the owner/founder wearing many hats, undertaking the roles of head of operations, financials and rainmaker. However, buyers want to see a company that can survive its founder’s departure. A founder still occupying a sales or client relationship role could be a red flag to potential buyers. Owners should establish professional management that can continue running the firm after the founder exits and transitions day-to-day management to them. This strategy can also position the owner to step away from daily function and work on the business in a strategic capacity to grow value.
Mistake No. 2: Having inadequate operational and financial infrastructure
Many business owners underestimate the importance of surrounding themselves with a team of experts to advise them on operational and financial improvements to boost the value of their business. As a business progresses out of the “start-up” phase, partnerships with strong finance, legal, insurance and HR professionals are key to avoiding pitfalls that could result in value destruction. Graduating from tax returns to CPA reviews and eventually an audit, signals that the financial governance of the business has been independently reviewed and may be accretive to the value of the company. Additionally, as a business owner, reviewing key suppliers and vendors for integration may unlock hidden value within the company. For example, if a manufacturer uses another firm to make crucial parts, it should consider moving such production capacity in-house, find additional vendors that can produce the parts, or consider making a strategic acquisition to reduce the business’s dependence on others.
Mistake No. 3: Ignoring “curb appeal”
When we sell a home, we tidy up the yard, apply a fresh coat of paint and declutter for maximum curb appeal. Similar rules apply to selling a business, although corporate curb appeal also includes the firm’s financials. Owners should make sure that their books are in perfect shape and their financials tell the right story. Strong balance sheets and income statements that demonstrate diversity of clients, asset controls and sound debt management is key and should be evident for at least the last three to five years. Be sure that any considerable financial changes can be explained and occur as a natural course of business versus being prepped for sale. To the extent possible, avoid changes in accounting procedures, large inventory or accounts receivable write-offs, and other unusual accounting tactics in the lead-up to the sale.
Mistake No. 4: An unhealthy number obsession
Too many owners obsess over selling for a certain number. Surrounding yourself with the right advisors will help inform this view based on industry and market data. I saw a company’s founders command $50MM for their business that had high margins and a significant client concentration, effectively 1 client, accounted for 80% of revenues. As the company went to market, the ownership got a solid offer from a financial buyer for $42MM and the deal didn’t progress. Instead, the owners took the company off the market and brought in family to run and grow the business. Only time will tell if this was the right strategy for the company’s founders.
These four mistakes are endemic and can adversely affect the financial well-being of families. Most businesses that do manage to complete a sale still leave significant value on the table by not taking the time in advance to ready the operation for a deal. In many cases, businesses sell for 15% to 30% less than would have been possible because of their mistakes.
Owners thinking about selling should assemble a team to help them prepare. That team includes a certified public accountant, an attorney, an investment banker or business broker and a specialist exit consultant that can develop a multi-year plan setting out what steps the owner should take to achieve various desired outcomes. Also, do not be afraid to answer the phone and listen. Well-run businesses get noticed and you never know when the right strategic or financial partner may reach out.
Once an owner undertakes that exercise, he or she will know the answer to the two crucial questions in any exit: Where do I want to be, and how do I intend to get there?
Mark Abell & David Stahl
Mark Abell (left), SVP and SBA Division Director and David Stahl (right), SVP and Managing Director Commercial Banking at Hillcrest Bank, a division of NBH Holdings.