I played a lot of baseball growing up. One of the best pieces of advice my coaches gave me was this: “Boy, don't go into the batter's box without a plan.”
My coaches wanted me to exude confidence every time I stepped into the box to show the ball that I was fearless. Most importantly, they wanted me to know what I planned to do before each pitch based on who was on the mound, how many runners were on base, how fast those runners were, and where the defense was positioned on the field. Having a plan prepared me for certain pitches and where to put the ball based on where the pitcher liked to throw. When I stopped hacking everything the pitcher served me, my batting average went up significantly.
It's the same when a client tells you they want to sell their business. If they go to the market without a careful plan and take whatever offer the first buyer offers them, they will simply be hacked and disappointed with the result.
Since you only get one shot (not three) at our business, here are five key areas in which you can greatly help the business owners you work with prepare financially and psychologically to leave:
Emotional Considerations
The psychological and emotional aspects of exiting a business are often underestimated. Many business owners have a deep personal connection to their companies and haven't thought about what their lives will look like after the exit. If they are not prepared, selling their business can be more like a death in the family than a joyous event. They may feel a total sense of loss and direction. While the risks and stress of running a business have faded, some have loved the adrenaline rush. That's a big gap to fill, especially when they suddenly have 50, 60 or 70 hours a week of free time on their hands. Some owners think they can fill the gap with travel, golf, new hobbies or other sports. But eventually, the allure of those endeavors pales in comparison to the rough and tumble world of entrepreneurship, and they easily get bored, give up, or go back to business. In some cases, they may start another business. But nothing will ever fill the hole in the owner's heart.
Make sure the owners you work with understand that if they can't put aside their passion for the business, they will have a hard time coping with life. Their marriage and relationships with children, grandchildren and friends may suffer. Help the owner think through their options and identify activities that satisfy them and give them a sense of purpose. In many cases, they can find fulfillment in consulting, coaching, mentoring or volunteering. Regardless, they should think about these activities and find a way to diversify their interests before selling.
No more Piggybank companies
I've seen many owners (and their advisors) forget to factor into the sale price how much more their personal expenses will increase once they exit the business. Suddenly, the owner has to start paying out of pocket for things like their cars, boats, country club memberships, travel, concert tickets, and dining expenses instead of running them into the business.
As an advisor, you can provide significant value by helping owners understand their real day-to-day living expenses after exit. Doing so well before the sale will help the owner come up with a minimum sale price they can accept to support their post-exit (post-pig) lifestyle.
Time considerations
The optimal time to exit depends on many factors, including market conditions, business performance and personal readiness. Timing can be more complex than financial considerations.
Make sure the owner understands that their offer may not be a cash sale. It is more likely to be cash and a note, and the note may be a profit. When the deal is finally signed, buyers expect the business to remain at least as successful as it was when the founder ran it. They need protection in case the business falters due to factors such as the economy, new competitors, litigation, key employee departures or technology disruption. This can change the contract agreement and significantly reduce the owner's total payment.
You want to help the owner with a contingency plan so that they are not 100% reliant on the proceeds of the sale for their financial security. We often see this with owners who have invested significant personal capital in their businesses. They may have 90% of their net worth tied up in the business, hoping to free up that cash when they sell. As the old saying goes, “Hope is not a strategy.”
Instead, an emergency plan consists of two elements. First, it's about helping the owner build enough assets outside the company so they have enough income to live on if the company has cash flow problems or if the sale ultimately falls through. (Remember, three-quarters of businesses never sell.) The second element is a life plan. Help the owner be very clear about his life after the business. The sooner they put a plan in place, the better their chances are of living a productive and active life in retirement. Tip: It will take a lot of changes and difficult conversations with you to get your life plan right.
Operational Readiness
Make sure your clients know that preparing a business for sale or transition can take years. This includes streamlining processes, building a strong management team and reducing owner dependency. Encourage your customers to think about how they can make themselves “operationally irrelevant.” Can they be away from business for weeks at a time and still have everything running smoothly? Getting to this point isn't easy, but it will do wonders for the owner's stress level and greatly increase the company's valuation.
Unfortunately, most business owners are unable or unwilling to make these difficult decisions. That's why SCORE data finds that only 20% to 30% of businesses that go on the market ultimately sell — and even fewer sell for what the owner hoped to get. This is where it comes in.
Succession planning
Owners often care deeply about maintaining their company's culture, values and impact after they exit. This goes beyond maximizing financial returns. It is not uncommon for owners to be caught off guard when the sale occurs. When departure day comes, they are leaving a large part of themselves behind. They are apt to ask themselves, “What difference have I made in this life?”
Unfortunately, for many owners, the answer is de minimus. Because of their relentless focus on business, they may have broken marriages, poor relationships with their children, and a void they filled with the company. When company leaves their lives, there can be an even deeper emotional void to fill.
Pre-sale estate planning allows you to help the owner identify the causes and organizations they want to help most (with money or volunteer time) and how much of the sale proceeds they want to go to children, grandchildren or other family members . You can also help the owner determine if their beneficiaries are mature enough to handle their windfall in full or if they should be packaged in stages as they grow older. All these decisions have tax consequences. Addressing these issues in advance can give the owner considerable peace of mind, better timing and terms of the deal, and more clarity on the minimum.
Dr. Guy Baker is the founder of Wealth Teams Alliance (Irvine, CA).