How did we ever get anywhere before GPS? Talk about a “killer app”! Yes, we’ve always had maps but unless you happened to have a street map for every city and town in which you had an appointment, that Rand McNally in your glove compartment only took you part of the way there. Sure, we could ask for directions. I often found that people who actually knew their way around couldn’t give good directions because they didn’t know street names in their hometown. “Turn right where the old schoolhouse used to be.” And then there were all those people who had absolutely no idea where they were going but really, really wanted to help. Thanks!!!
GPS has changed all that. It occurred to me that since exiting a business is a journey, complete with the occasional wrong turn, (“…recalculating”…), it might be useful to approach exit planning the way we use GPS.
So how do we use GPS? First question, “Where are you going?” In exit planning this translates to, “How much do you need to retire”? A surprising number of business owners get this first question wrong. After owning their business for 20 years or more, and believing all along that their business and their retirement plan were the same thing, owners come to the conclusion that their business is worth however much money they need to retire. “Why do you think your pizza place is worth $2 million?” “Because my grandchildren live in California and that’s what houses cost there.” Your retirement goal and your business sale price are two different numbers. At this point let’s just assume that 1) you have a rough idea of what you’ll need to retire, and 2) there may be a delta between that financial goal and the value of your business. We’ll get to closing that gap in a minute.
Second question, “What’s your current location?” Translation: “What’s your business worth today?” This can’t be a guess. It’s not a story about a guy you knew who sold a similar business across town, or a rule of thumb that says businesses in your industry typically sell for x% of sales. This needs to be an objective and justifiable number. Your best approach is to have a certified business appraiser complete an independent valuation of your business. While valuations are not free, good valuations uncover problems that are undermining your value and suggest strategies to increase value. They pay for themselves. After all, you have no hope of reaching your destination unless you know your starting point.
If you know where you’re going and where you are, your instincts may suggest that the next best question is “How do I get there?” It’s not. A better question is, “How long do I have to get there?” Do you want the fastest route? Least traffic? Avoid toll roads? Your planning horizon speaks to that gap between what you need to retire and what your business is worth. You can get almost anywhere if you have enough time. The tragedy is that the vast majority of business owners don’t start planning early enough. They wait until family issues, or health issues, or partner problems, or simple exhaustion requires that they sell in 12 to 24 months. That’s not much time to close a significant gap between your retirement goal and your business’ value.
Once you know how long you have to get there, you’re in a position to make an informed choice about the right route to your goal. More time gives you more options. A few of the longer term options include:
- ESOPs – Employee Stock Ownership Plans are most commonly used to create a market for the departing owner’s shares of stock and significant tax benefits for the owner.
- Acquisitions – Owners can grow their firms by acquiring compatible competitors. The right acquisition will pay for itself out of the cash flow of the acquired company.
- PEGs – Private Equity Groups will buy a portion of the owners stock and invest in the company’s growth. The value of the owners retained stake grows as the company grows and the owner approaches retirement. You get two bites at the apple.
If you need to exit sooner than that you’re still not lost! A few of your routes to increased value include:
- Finding a strategic buyer – The right strategic buyer will pay more for your company than a hypothetical financial buyer in order to achieve growth synergies and improve cash flow by wringing out redundant costs.
- Reducing inventory – In some cases the sale of excess inventory can significantly increase the owner’s proceeds at sale.
- Selling non-operating assets – Much like reductions to excess inventory the sale of assets that are not contributing to earnings can increase effective sale price.
- Reporting all income – How do we say this politely? Some owners, often in retail, describe something we’ll call “unrecognized income”. The truth is that practice costs you a fortune when it’s time to sell the business. We can prove it to you. Stop doing it.
- Adjusting the capital structure – Some owners consider it a badge of honor to be able to say they have “zeeero debt”. While it might feel good to say it, in practice some debt can leverage performance, improve cash flow, and increase selling price.
Let’s switch from “Map” mode to “List” mode to summarize:
- Know where you’re going. What do you need to retire? Your retirement goal and the value of your business are two different numbers.
- Know you current location. Get a professional valuation done on your business.
- Give yourself enough time to get there. Five to eight years is a practical planning horizon, particularly if you have a long way to go. Even if you don’t have that far to go a longer planning horizon gives you a little extra time to recover from a bad year or a wrong turn (“..recalculating”..). And if you have less time than that, start now!
- Select your route. You probably have more options than you think you have. Travel with someone who’s been there before. ROI can work the GPS while you keep your eyes on the road!
Contact Michael at ROI today for a no cost evaluation of your Exit goals.
Michael has been a highly successful Business Intermediary at ROI for three years. Prior to joining the firm Michael was a VP Business Development for a $6B transportation company where he lead a sales force. Michael also searched out and evaluated corporate acquisition candidates for entry into new markets for his firm. Michael has managed sales organizations for training and relocation companies. Earlier in his career Michael owned a promotional products company in Massachusetts. His experiences as an entrepreneur and in helping his prior employer acquire the competition are invaluable assets in helping business owners to value and sell their firms. Michael received an MBA from Northeastern University. He and his wife Linda live in St Petersburg FL where he is in the process of opening ROI’s Florida office. He is a member of the Institute of Business Appraisers (IBA) in good standing.
ROI Corporation Provides Business Brokerage, Mergers and Acquisition services, Business Family and Key Employee Transition Services, Exit Planning Consulting and Business Valuation Services principally in MA, NH, VT, RI, CT, NY, ME and FL as well as nationally. ROI has been involved in assisting clients in the sale of businesses and real estate in 39 states.