I frequently hear business owners and clients tell me that they have someone interested in buying or investing in their business. As they are telling me, there is often enthusiasm and excitement in their voices. Through our years of experience with clients on both the sell-side and the buy-side of transactions, I have learned that there is a great deal to be excited about, and even more to be concerned with.
How do you know if your business is attractive to a buyer or is ready to be sold?
Let’s think about it this way. We recently went through high school prom season as the school year was coming to an end. A young man sees a young lady around several times and wants to ask her to the prom. What are his standards? Even though he doesn’t call them standards, he has standards. Is she cute? Does she have a good personality? We could go on and on here. These are questions of attractiveness that the young man is making from an outsiders’ perspective.
The young man asks that young lady to go to the prom, and she is absolutely ecstatic (or at least I hope so!). She says yes to the nervous young man, but is she ready to go to the prom? Absolutely not! She doesn’t have a dress, her hair and nails aren’t done, and, if she lived in my house, she hasn’t asked her parents yet. The difference here is that the assessment of being ready is being made internally, or by someone that is qualified to make sure she is ready to go to the prom.
Determining whether a business is attractive to buyers/investors or ready to be sold largely depends on who is making the assessment and their qualifications to make that assessment. While it is exciting to have someone approach you to buy or invest in your business, your business needs to be ready to sell, not just be attractive from the outside. If you enter into conversations with the buyer prematurely, the value that you will receive from the buyer is likely to go down and could decrease significantly.
There are four categories of factors that make a business attractive to a buyer:
Within each of these categories, there are things that the seller can and can’t control. Each of these categories can be expanded with a multitude of questions and concerns.
How do you make the assessment that you are ready to sell your business? Here are 11 things to consider:
- Have you spent time and money to educate yourself on the process of transitioning your business?
- Have you discussed transitioning with your family and loved ones?
- Are your personal, financial and business goals defined, aligned, co-dependent, and linked?
- Have you established a transition advisory team?
- Have you created and reviewed with family and key advisors a contingency plan which would include buy-sell instructions, appropriate insurance, and the specifics of what should happen if you could no longer operate the business?
- Have you completed a strategic analysis, business valuation, and personal, financial and business assessments within the last year?
- Have you considered all of your exit options and optimum deal structure in relation to your goals and objectives?
- Do you have a written transition plan?
- Have you created a life after business plan and is it linked to your wealth management plan?
- Have you undertaken pre-transition value enhancement steps to de-risk your business, maximize the value and minimize the tax impact of selling your business?
- Do you have a management program underway to ensure that your post-transition leadership team is capable of operating the business without you at the helm?
According to a 2013 study completed by the Exit Planning Institute, only 34% of business owners have completed any education to understand the process of transitioning their business, only 14% have establish an advisory team to help them through the process, and only 12% have a documented and communicated plan. Couple these statistics with the fact that only 20%-30% of business that are marketed are ever actually sold.
It is likely that the value of your closely held business is the most valuable asset you own. Invest the time and money to transition it properly. It is your legacy and your family’s legacy.
We are trained and certified in the exit planning process and can help you assemble a team to achieve your goals. I would be glad to answer any questions that you have in this process.
Tax returns, financial statements, IRS communications and similar items are vital to address and process, but they should not be the focal point. Think of these as tasks to get to the real work, which is providing you the information you need and an interchange of ideas to move you forward. The goal is to help you implement your strategies and vision. This is what we do!