With optimism among small-business owners at its highest level in 35 years, profits buoyed by corporate tax cuts and financing readily available at low interest rates, this is the best time in years 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 owners often make mistakes that complicate an exit from their business on attractive terms.
Entrepreneurs that want to sell for more than book value — the value of their assets alone — should ideally devote as much as 3 to 5 years to getting their business in the best shape for sale. Then, owners must avoid four common mistakes:
Mistake No. 1: Having a superhero complex
Many businesses start with the owner as superhero, undertaking heroic efforts as lead salesperson, executive and rainmaker. When selling, however, buyers want to see a company that can survive its founder’s departure. A founder still occupying a sales or client relationship role is a red flag to potential buyers. Owners should establish layers of professional management that can continue running the firm after the founder retires. That has another benefit as well: Even if the firm fails to sell, the owner can retire with every expectation that the new professional management team can run the firm, producing the founder’s desired retirement income.
Mistake No. 2: Having inadequate infrastructure
Small businesses often keep operations lean by using outside professional services, such as accountants, for critical functions. Buyers, however, prefer firms with more in-house infrastructure. While an outside accountant can be effective at keeping books and minimizing tax liabilities, an in-house team will do better at developing strategies to boost profits. Similarly, if a manufacturer uses another firm to make crucial parts, it should consider moving such production capacity in-house or finding additional vendors that can produce the parts, to reduce business dependence on others. Firms should also establish corporate procedures, documenting business processes including employee benefits, strategies to identify and advance high-achieving staff, as well as long-term growth strategies.
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, going back three to five years, and that inventory appears well managed. Avoid changes in accounting procedures, large inventory or accounts receivable write-offs, and other unusual accounting tactics in the lead-up to the sale. Similarly, equipment and machinery should have up-to-date maintenance records.
Mistake No. 4: An unhealthy number obsession
Finally, too many owners obsess over selling for a certain number — for example, demanding a $1 million cash sale. However, a successful sale often requires some creativity. Perhaps the buyer is willing to pay $1 million if the seller is willing to carry 20% over five years and the seller agrees to stay on in a consulting capacity for one year to smooth the transition. That approach may make a banker more willing to provide financing. In most cases, this approach would also lower the tax obligations for the seller. Another creative approach is to identify a younger executive to buy the firm from within, developing a deferred compensation plan to help that person build a down payment fund of 15-25% of the business value over five years while training them to take over operations. At that point, the young executive could finance a buyout, because banks will often lend up to $4 of debt for every dollar of equity, and the risk of transition is low.
These four mistakes are endemic and can crater retirement plans. Recently, for example, I saw a local bike store client close over failure to secure financing for one partner to buy out the other because the business could not sustain the required loan based on existing cash flow. Had the selling partner planned for his departure, or had the partners together developed a more creative financing plan, the firm may have survived. Instead, the business closed, the retiring partner has no income and the surviving partner is trying to set up a new business.
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.
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 is Senior Vice President and SBA Division Director at NBH Bank, Member FDIC. Equal Housing Lender. NBH Bank serves clients through Bank Midwest, Community Banks of Colorado, and Hillcrest Bank.)