Bruce Swabb, CPA
In this third segment of our exit planning discussion, I’ll share some thoughts and insight about the “middle” stage in the progression towards retirement from your current business. In this stage you have been operating your business successfully for a number of years, but more and more, you are wondering how much longer you are willing to keep plugging away. If cornered on the subject, you would say that you’d like to sell the business within 3 to 4 years.
With a 3 year planning window, you have a couple more options than the chap we discussed in my last post who was out of gas and out of time. With a more relaxed time horizon, we can make your business shine!
Maintain Control – A very important element in selling your business is maintaining control of the process. If you have a more relaxed time horizon, you can dictate the pace of activity and will be in a better position to negotiate your most important terms with buyers. When the best prospect comes along, you can act decisively. Do not let buyers hijack the process!
Refine Market Value – As you set your sights on an eventual sale of the company, every strategic decision should be designed to enhance its market value. Most valuations will be based on a weighted average of the previous 3 year’s activity. As brokers, we are very actively involved in assisting our clients in determining market value and setting a pricing strategy.
Head Start on Due Diligence – Selling your business the correct way takes a bit of time and a methodical action plan BEFORE placing the business on the market. Many of the warts can be minimized or eliminated, your financial records can be cleaned up and properly classified, and you can prepare a thorough information package in advance, so that all you need to do is provide a PDF presentation to prospective buyers. Professionalism! This approach will generate a much higher level of respect from buyers. They will be less tempted to go the “low-ball” pricing route.
Another Option Does Exist – And you still have time to set an alternative to selling in place. What if all our homework leads you to the conclusion that after transaction costs and taxes, the net cash from the sale of your business is less than you expected? What if it is downright unsatisfactory?
With a 3 to 5 year time horizon, there may be an alternative in which you organize your company so that while you continue to own it, you have a managed transition to a lesser day-to-day obligation. Hey! A vacation is an option! And you might be free to focus more on your most important customers! Meanwhile, the business continues to provide a stream of income for you.
As part of the "American Dream" I referred to in our first post on our exit planning excursion, we have been conditioned to believe that private businesses must be sold to reap the final reward for all of our hard work. The reality is that the biggest benefit your business has provided is the stream of income that it has ALREADY paid you over the years. Once sold, the net cash from the sale of the average business only provides a few short years of cash flow! Maybe I'm wrong, but I doubt you plan to get a part-time job after selling your business.
Now, this idea of reorganizing your business to enable you to essentially retire, and using it to provide a continuing cash flow for your retirement years deserves its own blog discussion. But the key point is that by thinking about these issues just a few years before you intend to sell – or do something – you have the option. Develop the idea, and then quantify the potential result. Then you will be in the position to choose the better path.
A quick look back at the options that should fit with your 3 to 5 year time horizon:
- A traditional sale, but with an excellent action plan to prepare and maximize the market value of your company;
- And we’ve also contemplated whether a sale is the best option for you. We planted the seed for how you might create a stream of cash flow on into retirement. The vast majority of business owners don’t realize that this option might exist, and virtually no business brokers will pose the idea!
In my next post I'll discuss the options available to that very rare bird who puts an exit strategy in place waaaaay before the target transaction date.