It Is Inevitable – You Will Leave Your Business
There will come a time when we will all leave our businesses. What separates how this happens and the outcome depends on the path that we take when this time comes. Some of the most common ways that business owners leave their businesses include; selling to a third party, transferring to a family member, and simply walking away and closing the doors of the business. What sets the resulting outcomes apart from others is whether or not the business owners planned in advance for the sale of their business, or took a passive approach and did nothing.
Pitfalls of Failing to Plan
In a recent International Business Brokers Association poll, it was determined that 83% of business owners with businesses with a value of <$500,000 conducted no formal planning prior to engaging an intermediary to sell their business. Owners of businesses with a value of between $5,000,000 and $50,000,000 were a bit more proactive in that 38% of them failed to do any advanced planning.
Figure 1 – Percentage of Business Owners, By Business Value, Who Did No Formal Planning Prior to Engaging an Intermediary to Sell Their Businesses
Even those business owners who are planning in advance, very few of them actually meet with any type of a professional adviser, such as a CPA, financial planner, attorney, business broker etc., to discuss their exit strategies a year or more in advance.
Figure 2 – Of Those Who Plan, Few Business Owners Plan Years Ahead
There are a number of reasons why business owners fail to plan, but the most likely reasons for this lack of planning typically have something to do with a precipitating event, which may fall into the category of what we refer to as the “Dreaded Ds” – death, divorce, dispute, disability, and done (as in I am so done that I am willing to walk away from this business). As you might suspect, business owners who end up in this category can sometimes put together a successful sale of their business, but usually at a much lower sales price that what they might have realized if they would have planned for the sale. Sadly, the most likely scenario for these business owners is that they will lock their doors and close their businesses. Many of these owners will be forced to sell their equipment and inventory at a small fraction of what it is worth, and in some cases, they may have to deal with a still active lease of a facility and/or equipment.
Benefits For Planning Ahead
In most cases, business owners who consult with professional advisers and plan for the sale of their businesses at least three years prior to engaging to sell their businesses, will have a much higher chance of selling their businesses, and for a higher price. Some of the general reasons behind these increased odds consist of the owner and the business having/providing:
- Organized and professionally prepared financial statements
- Realistic price expectations along with acceptable potential deal terms
- At least three years remaining on the facility lease (if not owned)
- Documented procedures/processes in place
- A well-trained work force and management in place, which leads to the business being less reliant on the owner
Increasing the likelihood that you will someday be able to sell your business is an ongoing process that doesn’t happen overnight. The earlier your start and the more proactive you are in the planning for this day, will increase your odds of success. In the word of Winston Churchill, “He who fails to plan, is planning to fail”.