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Most of the members of the Financial Planning Association of
Nevada have clients who own at least one business. It is just a matter of time
before those clients will either want, or need, to sell their business(es).
This time is approaching rapidly for the average business owner who is 65 years
old or older, and is also being accelerated by the economy. According to the
publication M&A Today:
- 75% of a business owner’s net worth is tied up in his/her
business.
- 65% of all business owners do not know what their business is
worth.
- 85% have no exit strategy.
A survey of business owners, by the Rasmussen Group, revealed
the following disturbing statistics, which, in my opinion, show that the average
business owner is not prepared:
- 42% of small business owners have NO plans to retire.
- 22% of small business owners plan to close their business upon
retirement, rather than sell it or hire a manager.
- Only 16% of the owners plan to transfer ownership of their
business to a family member (this was the dominant form of transfer in the 20th
century).
- Approximately 40% of small business owners have encountered
temporary, or re-occurring, cash flow problems.
As the Platinum Sponsor of the FPA of Nevada, I have been
invited to present an article each month, which will give you some useful tools
and information to aid you in assisting before, during, and after your client
exits his/her business. I am entitling the series Business Transfer Boot Camp
for Financial Planners. The simple premise is: your clients “need your help”
developing and implementing a succession plan and maximizing their after-tax
proceeds as a result of selling their business (i.e. “the liquidity event”).
Some of them do not even recognize that time is getting very short to start the
process.
As I see it, a professional financial planner plays a crucial
role in the process; and, in addition to the typical analytical and tax strategy
roles, performs the following non-analytical functions:
- Succession Planning is largely an “Emotional Decision” on the
part of the business owner.
- Communication is essential because each stakeholder’s
emotional and financial needs will differ.
- Patience: Succession planning is a time-consuming process,
which occurs before, during, and after the transfer.
- Compassionate Attitudes help alleviate the human distress
associated with a change in business ownership.
This month, I present the following basics about business
owners and their exit strategy options:
- Reasons Businesses are Sold
- Questions a Business Owner Must Be Able to Answer.
- Possible Exit Scenarios
- Possible Buyers
- Ten Key Questions for the Privately Held Business Owner
- When is Wrong Time to Sell?
- When Is the Right Time to Sell?
- Five Steps to Maximizing the Selling Price of a Business.
This month, I
shall also present a quick questionnaire you can use to judge if your
client’s business is ready to go to market, or if there is some work
required first.
Volume 1, September 2009
Basics About Business Owners and Their Exit Strategy Options
This month, I shall present some basics about what business
owners sell, their options, and their motivation. In future volumes in this
“Boot Camp” series, I will get more specific with regard to valuation and
techniques you can use to maximize your client’s exit.
Reasons Businesses are Sold
- Owner Burn-out
- Owner’s desire for personal diversification (i.e. he or she
wants to pursue other interests)
- Loss of market share by the business
- Business growing too quickly and the owner can’t keep up
- Business has a negative cash flow and the owner has no capital
sources
- Owner is retiring or semi retiring
- 2nd generation is not up to the task
- Divorce or partner disputes
- Owner health issues
- Owner’s death
Questions a Business Owner Must Be Able to Answer
- Do I really want to sell my business?
- Why do I want to sell?
- What am I going to do after I sell?
Possible Exit Scenarios
- Close the business
- Accident, illness, or death
- Succession
- Sale of business
Possible Buyers
- Family
- Other owners
- Management
- ESOP
- Third Party Buyer
Ten Key Questions for the Privately Held Business Owner
1. Have you defined your personal goals and the vision
of the transfer of ownership and management?
2. Is your successor identified, ready and in place?
3. Have you considered the importance of family
involvement in the leadership and ownership of the company?
4. Are you currently using techniques to reduce or
eliminate estate taxes?
5. Do you have enough liquidity to avoid the forced
sale of the business?
6. Do you have a buy/sell agreement in place?
7. Do you have a contingency plan if you become
disabled?
8. Have you considered alternative corporate
structures or stock transfer techniques to help achieve succession goals?
9. Are personal retirement savings sufficient to fund
you retirement cash flow needs?
10. Have you had the business valued recently?
When is the Wrong Time to Sell?
The “Dismal D’s”:
- The Owner: Death, Disability, Divorce, Dissenting Owners.
- The Business: Declining Cash Flow, Down Business Cycle, Debt
Overload
- Business Transaction Maxims:
- Business Owners seldom sell “too soon”, but often wait “too
long”.
- By failing to make the decision to sell when the “Timing is
Right”, the business owner allows it to be made for him/her – often when the
“Timing is Wrong”
When Is the Right Time to Sell?
- Buyers are motivated and competing to buy.
- Finance sources are willing to fund the acquisition.
- The company is maximizing its profits.
- More growth is expected in the market place.
- Owners are motivated, but not compelled to sell.
Five Steps to Maximize the Selling Price of a Business
- Select Competent Advisors (Business Broker, CPA, CFP®, and Attorney).
- Prepare the business for sale.
- Time the sale.
- Target the Buyer.
- Control Financial Risks.
Traits of a Highly Marketable Business
Click here for a quick one-page
questionnaire which lists the traits of highly-marketable businesses. You
can use this to assess whether your client’s business is ready to go to market.
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