Business Succession Planning - Part I

J. Wade Lopez, CFP®, MSFS Abingdon, Virginia. August 25th, 2021

Selling Your Business Should Be a Positive, Rewarding Experience

As a wealth advisor, it’s always amazing to me when I encounter business owners who want to sell their company but feel stuck and anxious about getting it done. And to be honest, that covers most successful business owners, especially those in their sixties, who are approaching retirement and looking to monetize what they spent a lifetime building.

But, there’s almost no reason why selling a business can’t be a positive, rewarding experience. And remembering a few vital guiding principles can help make it so.

First, I have to say that we understand why business owners can feel stuck: Maybe there aren’t any family members who want to take over the company. Maybe there’s no one internally with enough interest, management expertise, or capital to take over. Or perhaps a deal fell through because you couldn’t find enough common ground with the buyer.

We get it. But none of these things should take away from your excitement about the future or dampen your spirit as a business owner looking to sell. There are more deals out there and more different kinds of deals than most business owners ever imagined.

To prepare, and hopefully get the best deal possible, just do a little preparation and keep in mind a few simple rules:

Be Realistic About Value: Most owners over-value their business because of all the years they’ve invested into it and their deep emotional ties to it. But the truest thing you can say about a business is that it’s only worth what someone is willing to pay for it. You can’t apply a generic industry multiple to your business without considering the performance of the business itself. The only way to know what the business is truly worth it to have a professional, accredited valuation expert examine the business from top to bottom.

Know What Makes You Different: What makes a business successful (unique even) is its processes. How do you do what you do? And how does that translate into profits and cash flow? Can you explain how you make money? Consider: Maybe your company thrives on patentable processes or technology; maybe your retail or service business earns a premium for its high-touch customer experience. Spend some time figuring out those unique processes that drive value in your business because that’s what the right buyer will pay a premium for.

Document (and Think About) Your Numbers: Buyers want a profitable business that’s growing, and you need to be able to demonstrate those trend lines with math. To the end, as you examine those numbers, take a moment to consider whether you need to adjust your cash management practices. One of the biggest red flags to a buyer is an owner taking cash out and not reinvesting in the business. Now, business owners are often told by their accountants to spend money to reduce their tax liability. But a buyer wants to see money going back into the business and that investment generating a return. So, spend some time thinking about where your cash is going and whether you need to make any changes in anticipation of selling your business.

Don’t Limit the Pool of Buyers: Too often, a seller will put a long list of restrictions on a sale, essentially telling a buyer: “You can buy my business, but you have to run it my way.” In those cases, the unstated message is that the seller doesn’t really want to sell. The seller wants to monetize the business but doesn’t want to relinquish control. Instead, you would be wise to sit down and think through: “What are my one or two must-haves?” Then let the rest go. Maybe that’s keeping on long-time employees or respecting certain vendor agreements. Just don’t make the list too long, or it could drive buyers away. After all, they’re putting up good money to buy a business; they should be able to run it their way.

Be Prepared to Stay: This might be wonderful news to owners who want to sell but aren’t quite ready to turn over the keys and close the door for the last time. Most transactions will put some kind of golden handcuffs on a seller. The owner holds all the proprietary knowledge about what makes the place tick. It takes time to transfer that knowledge to the new owners. So, expect to stick around for a few years before executing your exit strategy.

It’s important here to reinforce the idea that selling a business should be a great experience. It’s the first step toward the next phase of your life and that’s a reason to get excited.

The other reason to get excited: there’s plenty of money, plenty of buyers, and plenty of deals to be had. You just must set yourself up the right way and get the right kind of business succession advisor.

So, stay open-minded, and if you’re feeling stuck and need a pep talk, just reach out—we’ll be glad to walk you through a business succession plan.

Read More By J. Wade Lopez, MSFS, CFP®

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investment advisory services are offered through Concord Wealth Partners, an SEC Registered Investment Advisor.

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