Baby boomer business owners will retire in droves over the next decade, which means they will consider their options for passing on the business to family or key employees or for selling the business to a third party.
However, this process will be a new experience for most owners, since chances are, they’ve never tried to exit a business before, according to a 2014 survey of North American business owners by the Business Enterprise Institute (BEI), a business management consulting firm and network of exit planning advisors. As trusted advisors, accountants and business valuation professionals can help these owners through this stage and build a growing valuation practice in the process.
“Selling a business isn’t easy,” says Scott Vautrin, a former small business owner who is now an account executive at Sageworks.
Jared Johnson, director of business development at BEI, a business management consulting firm and network of exit planning advisors, says mapping out a plan to exit the business can help business owners:
• Avoid unnecessary or excessive taxes
• Minimize risk during any transition and
• Realize the full value of their life’s work.
“Many businesses that are supposed to sell, don’t,” Johnson said during a recent webinar for valuation professionals hosted by Sageworks. “If business owners aren’t getting the information they need to plan for and execute an exit strategy, it may explain why so many businesses listed for sale don’t ever sell.”
In the third quarter, only 6 percent of businesses listed on BizBuySell sold, which means that, averaged over the course of 12 months, 24 percent of listed businesses would be expected to sell this year. Indeed, anywhere from 20 percent to 33 percent of businesses listed end up getting sold, according to other industry estimates in recent years.
As Scott Miller, a nationally recognized expert on buyouts and employee stock-ownership plans (ESOPs) and the founder of Enterprise Services Inc., has written, “The key to exit planning is that it isn’t actually about the exit. It’s about the planning, the staging process that leads to a happy ending.”
According to Johnson, a successful exit will have five ingredients, and advisory professionals can educate owners about each of these:
1. A written exit plan based on the owner’s objectives. Having a written exit plan is critical to allowing business owners to remain in control of the process, Johnson said. “We talk to business owners every day who say, ‘I want to die at my desk.’ That’s OK, but what happens to your business and your family when that day comes? We see others who say they only want to work from 9 to noon, but they’re not willing to give over major control to this child or this key employee yet.”
An exit plan that is based on the owner’s objectives can address these various scenarios, he said. “Any exit route is possible with the right planning.”
2. An experienced team of advisors. Experienced advisors who can design and implement the plan are also important. Johnson recommends having one professional to “quarterback” the advisory team, pulling in others as needed for certain aspects of the transition. Accountants, brokers, other valuation professionals, lawyers, financial advisors and insurance advisors are among the professionals that provide exit-related services, but business owners may not take full advantage of these resources when it comes to succession or exit planning. BEI’s survey of business owners found that while 32 percent of business owners had discussed exiting their business with their spouse or other family members, only 12 percent had spoken with a CPA about it and only 13 percent had spoken with an attorney. These numbers show that accountants and valuation professionals have a unique opportunity to bring up exit planning with business owners and to lead the process.
3. Cash flow and a quantified business value. Financial advisors understand that the value of a business and its cash flow are, in many ways, tied together. A valuation professional can walk the owner through how the business’s value is determined and can identify and help the owner begin working on improvements related to cash flow (such as lower inventory days and accounts receivable) to boost the value, Vautrin said. Many deals fall through because the buyer and seller can’t agree on how much the company is worth. Determining the value and which financials influence it is a step toward avoiding that situation, and advisors who educate business owners on this fact may be able to generate additional business.
4. A strong management team. A strong management team in place can either make the business more attractive to a buyer or can make the transition to employee- or family owners go more smoothly. Some advisors recommend that if a business lacks sufficient management and can wait a year to sell, the company can implement an incentive compensation system (cash or stock-based) to reward key workers based on company performance and to build up the management team. Business owners may need professional help to develop these systems and plans.
5. Time. Finally, business owners need time for a successful exit. “Anywhere less than 18 months, you’re going to be in a bit of a bind,” Johnson said. Optimally, business owners will be planning three to five years in advance of an exit.
“That way if they need to build a management team or grow through acquisitions or organic growth, then they’ll have some time to do that,” he said. A large number of business owners who haven’t begun exit planning think their business is worth four to five times what it’s really worth. A good advisory team can get the owner where they need to be, Johnson said, “But we’ve got to have the time to do that.”
Combining these five ingredients will make the process of exiting a business much smoother, industry experts say. “Exit planning is scary,” Johnson said. “As business owners talk about exiting this thing they created and that supports their family, transitioning from the business is difficult to think about.” That’s where professionals with the right resources and tools can help not only establish the process but also drive the plan forward and reassure the business client along the way.
Download a complimentary practice aid that summarizes these ingredients for a successful business exit.