Business Owners Who Plan Ahead Increase Success

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“To will is to select a goal, determine a course of action that will bring one to that goal, and then hold to that action till the goal is reached. The key is action.” — Michael Hanson

If the thought, “Why create an exit plan when I can’t sell my business now or anytime soon?” has crossed your mind, consider the case of fictional owner Seth Cohen.

Seth Cohen’s hospitality services business had grown steadily until the last few years. Although revenues had flattened, Seth maintained profitability by reducing overhead and working more hours.

This was Seth’s situation when a would-be buyer approached. At age 55, Seth hadn’t actively considered selling his business, but was beginning to think that life after work might have something to offer. His business wasn’t providing as much fun as his other activities, especially since business growth (and more importantly, profitability) had been slowing for the last two years.

Seth scheduled an hour to talk to that interested buyer and in 60 minutes, his eyes were opened and his priorities turned upside-down.

The buyer, a large national company seeking to establish a presence in Seth’s community wanted, like most buyers, to acquire a business that could grow with little other than financial support and the synergies it brought to all of its acquisitions.

This meant it sought companies with a number of characteristics that we call Value Drivers. In future newsletters we’ll discuss all the Value Drivers, but for now some important ones are:

  1. Capable management apart from the owner. Seth’s buyer (again, like most) did not have its own management team to insert into the business. Seth had not attracted or retained solid management (nor had he created a plan to do so).
  2. Strong and increasing cash flow. Unfortunately, Seth’s company had been experiencing declining cash flow.
  3. Sustainable and comprehensive systems throughout the organization (from human resources to marketing and sales to work flow). At best, Seth’s business was a hodgepodge of stand-alone, as-needed systems created over time to respond to particular emergencies, and positioned Seth at all decision points.
  4. A plan to grow the business focused on enhancing a company’s unique position in the marketplace. Seth had never created a written plan, let alone identified or clarified his company’s competitive advantage.

When Seth failed to satisfy the buyer’s concerns about his company’s Value Drivers, he understood that his company’s value, management systems and growth all depended on his active and continued presence in the business.

While Seth had naively steeled himself for a lowball offer, the buyer instead disappeared. In today’s financial and economic climate if a buyer is willing to acquire a company that isn’t a turnkey operation, it will not do so without the owner’s continued involvement. Buyers do not have the time, the risk tolerance or the in-house talent to correct deficiencies.

While too many owners of outwardly successful companies share Seth’s fate, the heart of the problem lies in their failure / inability to do anything about it.

How long will it take you to avoid Seth’s fate and prepare for the sale of your company for top dollar? We don’t know. But we do know that it’s a lot easier to bury your head and go about working in the business than it is to devote the time, energy, and resources to prepare for your exit.

If you spend your time waiting passively for improvement in the M&A market or for a rising economic tide to lift your boat, those events may occur. But if they do and you have not actively used your time to make your company attractive to buyers (by installing Value Drivers) your business will still not likely sell, and if it does, it will not sell at a premium compared to other companies in your sector. Creating Value Drivers takes time; time buyers are not willing to take.

For Seth and for most owners, it takes at least five (and often as many as ten) years to execute an Exit Plan to make a business saleable. Factors that lengthen the Exit Planning Process include:

  • Unforeseen threats posed by downturns in the economy, your health or in the composition of your management team
  • An owner’s overly optimistic assessment of how rapidly the company and its employees can adapt and embrace change
  • The likelihood that you are more motivated than either your advisors or your employees to work toward your successful exit
  • The probability that everyday business crises will divert your focus from long-range planning.

 

Given that it takes time not only to create the plan but also to implement and to achieve measurable results, is it not time for you to start planning the most important financial event of your life—your exit from your company?

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

This is presented to you by Allen Business Advisors
1309 Beacon Street, Suite 300
Brookline, MA 02445


781-443-4874.  

Allen Business Advisors provides exit and succession planning, business brokerage services and business advisory.

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