Stepping out or cashing in
John Hammett
A recent report by CNBC highlighted the “Silver Tsunami” wave of baby boomers retiring. Here are the statistics:
• Boomers own 2.34 million small businesses in the U.S., employing more than 25 million people.
• Many are at a crossroads and need to determine if they will be selling their business or passing it on to a successor.
• But a recent survey by Wilmington Trust shows that more than 58% of small business owners have no transition or succession plan
There is an old saying about private company owners: “Every owner exits the business eventually. The question is whether the exit is ‘feet-first’ or walking out the door with cash and a smile.”
Owners of private companies put years of hard work, hard decisions, financial risk, and worry into building a successful business. There is personal satisfaction in the accomplishments along the way. As the business matures, becomes more profitable and the owner gets older, it is easy to be complacent. Too often, company builders overlook the need to plan for an exit that is smooth and successful.
Some owners tell themselves “I love my work; I’ll keep working until I die.” Is that fair to the family? Fair to the employees? Fair to the customers and suppliers? The owner who exits “feet first” leaves behind unfinished work, leaderless employees, and a lower value for the business.
There are two conditions necessary before you can exit your business in a positive way:
• The first condition is that the company must be profitable. If your company is profitable, you are halfway to a positive exit. An unprofitable company has no value other than shutting down, liquidating the assets, and paying the liabilities.
• The second condition is that the owner must no longer be essential to the operations of the company at the time of exit. This is basic, but often overlooked. If the owner wants to exit the company, the company must be able to work without him.
Six ways to exit your business:
• Shut down and liquidate. This is the default exit if no planning is done. It involves liquidating the assets like accounts receivable, inventory, equipment, and real estate, and paying off company debts like payables to suppliers, bank loans, and business credit card balances, equipment loans and mortgages. Sometimes, there is cash left over from this, but many times, the assets may not be more than the liabilities. In that situation, the owner will have to pay off debts from his own funds or liquidate the company in a bankruptcy process.
• Transition ownership to a family member. For many people, building a business and passing it along to the next generation is the American Dream. Sales to family are smooth and easy because there is trust between the seller and the buyer. But the owner needs to know if one or more of his children share the dream of taking over. Make sure that the children share the parents’ dream. For this to have the best chance for success, it helps to have a longer transition time to bring the successor up to speed.
A next generation family member may not have enough money saved up to pay a cash price to the owner all at once. A gradual transition of business responsibilities and payments is one of the benefits of selling to a family member. Unlike other options a poorly planned and executed family exit plan could bring heartache to both parties.
• Transition ownership to one or more employees. A transition to an experienced and loyal employee can be a good plan for the owner’s exit. Like the transition to a family member, it is good to have open discussions with a key employee or two about the idea of transitioning them to take over the business. This kind of employee transition gives time for the owner to transfer the management of the company to others, so that he may exit with good leadership in place.
Like selling to a family member, most employees won’t have the capital available to pay a full price a once. A plan for progress payments over time with gradual transfer of ownership is a common way to make this transition work and may bring higher value versus selling to an outside party.
• Sell to an outside person who wants to own and operate his own business. If there is no next generation interested in the business, and no employees interested in ownership, an owner may find an outside person who has an interest in owning and operating the business. This is known as “buying a job”.
Because this is a transition to an unknown person, it is important to be paid a bigger piece of the price at the time of sale, although it will also require the owner to take some payments over a few years.
• Sell to an institutional buyer that has appetite to own and grow the business. Larger businesses, with over $1 million in earnings (bottom line profit) may appeal to institutional buyers that buy and build private companies. Known as “Private Equity”, these kinds of buyers typically pay a large amount of cash on the sale, with some additional “earn-out” payments in the future.
These investors typically want the selling owner to continue to run the business for one to three years before their final exit. Occasionally, Private Equity firms will bring their own management team so the owner can exit sooner.
• Sell to a bigger company that wants the products, customers, and earnings of the business. Known as “Strategic Buyers,” these companies typically look for smaller business that they can “tuck-in” or “bolt-on” to larger companies they already own. Because it is expensive for these Strategic Buyers to acquire, they also have a baseline of earnings over $1 million.
Every owner makes an exit. An unplanned exit is usually messy and expensive. Planning can make a big difference in the value of your company when exiting and to the lives of the owner’s family, employees, customers, suppliers, and community.
Want to learn more? At North Idaho College’s Small Business Development Center our mission is to help your business thrive and grow. Exit Planning is just one aspect of fulfilling that mission. Digital marketing, E-Commerce, Leadership Development, Budgeting, Strategic Planning, and other tools are available to take your business to the next level.
• To learn More — visit North Idaho SBDC at NISBDC.com or Call 208-665-5085
• Check out Training & Webinars at NISBDC.com/trainings-workshops/
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John Hammett is our newest Business Coach at NIC’s Small Business Development Center. He has been an executive, owner, investor, and advisor with entrepreneurial companies since 1980. He has served as CEO of four manufacturing companies between 1980 and 2000. For the following 20 years, John was an investment banker, hired by owners of private companies to maximize their value when they chose to exit their business. John has a bachelor’s degree in economics and an MBA.
