Did you know 70% to 80% of middle-market, closely held businesses put on the market do not sell? And 83% of businesses lack a formal, written transition plan?
I’ve had many discussions with middle-market business owners about planning for the future in order to generate the most successful sale or transition of their business. In my September 2017 article, “Small-Business Owners’ Biggest Retirement Mistake,” I explained why a succession plan is critical to the future of any business, and now I’ll address how business owners can develop and implement a strategic succession plan.
While this may seem like a daunting task, it can be helpful to compare the process to the steps you would take to put your home on the market. Begin with an appraisal and home inspection to evaluate the current condition of the home and identify cosmetic and structural areas of weakness. Next, create a plan for improvement, such as fresh paint, new floor coverings and a refreshed landscape. Finally comes the most challenging part: executing the plan and following through on the necessary improvements to make your home market-ready. Making these modest improvements could make a meaningful difference in the final sale price.
These same steps generally apply to the process of preparing for a transition or a sale of a business, ensuring that you are succession-ready and maximizing enterprise value along the way. Below, we outline how to effectively identify key areas of weakness in your business, develop and deploy a strategic plan and successfully transition or sell your business when the time and offer is right.
This is essentially the appraisal and complete review of your business. A thorough assessment analyzes key areas of the business and identifies areas needing attention and improvement. The examination is taken from the eyes of a prospective buyer, and demonstrates to the business owner what drives value in today’s market. Proprietary software helps evaluate the current state of performance across eight major functional areas of the business:
Our approach has most often revealed poor-scoring results in three key areas: planning, leadership and people. Why? Most closely held business owners are too busy working in and managing their business with the help of a controller and have not delegated control. They are wearing too many hats. Sound familiar? Without a capable, competent and enabled management team behind them it is difficult to improve the position and value of their enterprise. Bottom line, if a business cannot operate without its owner/manager, there is considerably reduced value to a buyer.
An assessment helps to identify these pain points, so that you can develop a strategy to resolve them and maximize business value prior to a sale or other succession event.
If you move along at a productive pace, this initial assessment should take approximately 60 days.
2. Strategic Planning
Once you see what’s broken, you’re ready to design a blueprint to improve the value of your business. In partnership with certified exit planning advisers (CEPA), CPAs and attorneys, among others, it’s key to take a team-oriented approach to ensure the people who have a long-standing relationship with you will be an integral part of the planning process.
Without any significant hiccups, this stage should take four to six months.
With a plan in place, it’s time to put shovels in the ground and get to work. Over the course of one to three years, the strategy needs to be deployed to get the business transition-ready, sale-ready and succession-ready. Make sure to measure the success of current initiatives, and continually re-evaluate progress and objectives established in the strategic planning phase.
Perhaps the greatest challenge business owners have is implementing the plan and following through. Once the sobering reality of all the work they need to fit into their already busy schedule comes to light, many begin to lose their initial enthusiasm. Finding a trusted consultant who will motivate you and prepare you for the inevitable roadblocks you will approach along the way is crucial to achieving the best results. The more time you put in executing your succession plan, the better the outcome.
As with most things in life, there will be challenges. While sometimes the everyday whirlwind of business will get in the way of your ability to enhance and improve your enterprise, it is critical you do not deviate from this discipline. If the business owner doesn’t have the commitment, then almost certainly their employees won’t — it is a group effort to become transition-ready.
After successfully executing your succession plan, you will now have the confidence to entertain an opportunity from a potential purchaser. Being prepared for a potential buyer, you can evaluate whether or not it’s a good offer, what the pitfalls might be, and take a closer look at the tax implications. All of these elements will lead to a sale at the highest multiple of the original value.
Whether you are just launching your business venture or are a few years away from retirement, you should always keep the future of your business in mind. But remember, you don’t have to go through this process alone. Cultivate a trusted team of employees, managers and advisers, as well as family and friends, to help make the transition to the next stage of your life as smooth as possible.
(Article written by Nick Giacoumakis)