Get Your Business and Your Family "Deal Ready"

by Chip Cooper

The average transaction takes less than a year to complete, but becoming “deal ready” takes years.



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Every business owner wants to receive maximum value for their business at the time of their exit. That’s a given. Unfortunately, too many owners discover they have not put enough thought into a growth strategy to achieve that value, and they’re disappointed by the offers they receive when it’s time to sell. It doesn’t have to be this way. You can adopt sound strategies and practical techniques now that will positively position your business for transition. You just need some right information first.

70 to 80 percent of businesses put on the market don’t sell (Exit Planning Institute).

We think this failure rate is largely due to unmet owner expectations -- the surprises and disappointments they face from potential buyers at the time of transition.

No two businesses or owners are exactly alike, but many of the challenges they face as they endeavor to build maximum value – and exit on their terms – are similar. In working with business owners, we continually ask them to answer these 5 questions as we seek to build value and plan for transition.

What’s my business’ actual value right now?

Identifying value is the first step because it gives business owners a baseline measurement from which to track value over time. In other words, as they work to build (and hopefully maximize) value, this baseline number is there to gauge their success. If you cannot see increasing value, how can you know if the strategies you’re implementing are working?

But, the benefits of identifying your business value don’t stop there. Business value impacts the owner’s personal life, too, a fact often missed by business brokers. If you think your business is worth $15 million, but it’s only worth $9 million, that discrepancy will seriously impact your personal estate planning decisions and post-exit lifestyle choices. Wouldn’t it be better to know the reality of your business value far in advance of a transition, while there’s still time to do something about it?

What’s my real number?

Just as important as identifying value, it’s just as critical to understand now the approximate dollar amount needed to live the post-exit lifestyle you desire.

There are many variables that go into determining your number, but basically, we’re going to want to take stock of your future obligations, goals, and dreams. The tasks we must tackle include:

• Reviewing estate documents (e.g., will, revocable trust, financial power of attorney, health care power of attorney, living will), insurance policies and retirement account/pension beneficiary designations
• Retitling assets to avoid probate and maximize the use of estate exemptions
• Developing a detailed budget
• Preparing a personal net worth statement that reflects all assets and liabilities
• Undertaking a global investment asset allocation review with your financial advisor
  
  

Beyond that, and again what a lot of advisors miss, is the question of the kind of life you envision living after transition. Do you see yourself starting a new business, or acquiring an existing one? Will you consult part-time? Do you want to travel, pursue philanthropy, buy a vacation property, join an exclusive golf club, fund your grandchildren’s college years? Your life doesn’t end simply because you stop owning and operating your current company, so it’s important not to choose a transition partner who will leave you after the sale. In many ways, your life will begin again. Don’t neglect the planning of it. You’ll need money to make it happen, so identifying your post-transition goals, your current net worth, and your future expenses and obligations is critical at this time.

How can I eliminate risk to protect my business?

Business owners face a seemingly endless list of risks: lawsuits, regulations, technology, debt, customer concentration, human and intellectual capital, business model disruption, natural disasters, safety/compliance, embezzlement, death/disability, and cybersecurity, just to name a few.
The more risk that your business bears, the less someone will be willing to pay for it. Protecting business value, therefore, entails addressing and mitigating current and potential risk-related issues (business, financial, and personal). Have you begun that process? Do you even know where to begin?

How can I build value – in every way?

Building value is a necessary step for every business owner regardless of circumstances. Why?

• If you as a business owner have identified a gap between your company’s actual value and your target value, you’ll need to build value to close or eliminate that gap.
• If you’re lucky enough that your business’ actual value is also your target value, you’ll still need to build value so that you and your team can facilitate a transition under the time frame and conditions you desire.
• Buyers want to invest in growing companies. While the current value of your business may be of interest to a potential buyer, they might be wary of pursuing a deal if recent growth has been flat or modest.

When we talk about value, we’re really talking about two kinds of value: tangible and intangible. Tangible value is the “easy to see” stuff -- plant and building improvements, systems upgrades, marketing, and so on. Intangible value is everything else that matters: human capital, customer capital, structural capital, and social capital. When it comes to valuing a business, intangible value just as important as tangible value. You’re wise to focus on building both.

Which transition option is best for me?

Again, every business is different. No single transition option fits the needs of every business owner. If someone is trying to sell you an “out of the box” approach to transition, keep moving.
From family/intergenerational transfers to management buyouts, sales to existing partners, third-party sales and even liquidations, there are lots of roads to consider.

Our passion at Quest is to educate clients on the options available to them so that they make the best decision -- a decision which can only be made by weighing each transition option against individual business, financial, and personal goals. It's just what we do. Is your current transition advisor asking guiding you in this way?

If you have questions about maximizing the value of your business and/or need help aligning your personal and business goals, please reach out. While we advocate doing this years in advance of a planned transition, we can successfully navigate you through a transition when emergencies arise. Just give us a call. 
 

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