Originally published in American City Business Journals
By Mark Abell
With optimism among small-business owners at historic highs, profits buoyed by corporate tax cuts and financing readily available at low interest rates, this is the best time in years to sell a well-run company.
Millions of baby boomer business owners want to sell to fund their retirement: The Exit Planning Institute (EPI) forecasts 4.5 million firms valued at more than $10 trillion will be put up for sale in the coming 10 years as boomers try to fund their golden years.
However, only the best businesses — fewer than 30 percent— will sell, EPI says. That’s because owners often make mistakes that complicate an exit from their business on attractive terms.
Entrepreneurs who want to sell for more than book value — the value of their assets alone — should ideally devote as much as three to five years to getting their business in the best shape possible for sale. Then, owners must avoid four common mistakes:
Mistake No. 1: Having a superhero complex
Many businesses start with the owner as superhero, undertaking heroic efforts as lead salesperson, executive and rainmaker. When selling, however, buyers want to see a company that can survive its founder’s departure.
A founder still occupying a sales or client relationship role is a red flag to potential buyers. Owners should establish layers of professional management that can continue running the firm after the founder retires.
That has another benefit, too: Even if the firm fails to sell, the owner can retire with every expectation that the new professional management team can run the firm, producing the founder’s desired retirement income.
Mistake No. 2: Having inadequate infrastructure
Small businesses often keep operations lean by using outside professional services, such as accountants, for critical functions. Buyers, however, prefer companies with more in-house infrastructure. While an outside accountant can be effective at keeping books and minimizing tax liabilities, an in-house team will do better at developing strategies to boost profits.
Similarly, if a manufacturer uses another firm to make crucial parts, it could consider moving such production capacity in-house to reduce business dependence on others.
Firms should also establish corporate procedures, everything from employee benefits to strategies to identify and advance high-achieving staff, and should also develop a long-term growth strategy.
Mistake No. 3: Ignoring curb appeal
When we sell a home, we tidy up the yard, apply a fresh coat of paint and declutter for maximum curb appeal. Similar rules apply to selling a business, although corporate curb appeal also includes the firm’s financials. Owners should make sure that their books are in perfect shape, going back five years, and that inventory appears well managed. Similarly, equipment and machinery should have up-to-date maintenance records.
Mistake No. 4: An unhealthy number obsession
Finally, too many owners obsess over selling for a certain number, for example, demanding a $1 million cash sale. However, a successful sale often requires some creativity.
Perhaps the buyer wants to pay $1 million in five equal annual installments, with the seller staying on in a consulting capacity for one year to smooth the transition. That approach may make a bank loan officer more willing to provide financing. It would also lower any tax obligation for the seller.
Another creative approach is to identify a younger executive to buy the firm from within, developing a compensation plan to help that person build a 15 to 25 percent equity stake over five years. At that point, the junior partner could finance a buyout, because banks typically lend up to $4 of debt for every dollar of equity.
These four mistakes are endemic and can crater retirement plans.
Recently, for example, I saw a local bike store client close down over failure to get financing for one partner to buy out the other because the business could not sustain the required loan based on existing cash flows. Had the selling partner planned for his departure or had the partners together developed a more creative financing plan, the firm may have survived. Instead, the business closed, the retiring partner has no income and the surviving partner is trying to set up a new business.
Most businesses that do manage to complete a sale still leave significant value on the table by not taking the time in advance to ready the operation for a deal. In many cases, owners sell for 15 percent to 30 percent less than would have been possible because of their mistakes.
Owners thinking of getting out should assemble a team to help them prepare. That team includes a certified public accountant, an attorney, an investment banker and a specialist exit consultant who can develop a multi-year plan setting out what steps the owner should take to achieve various desired outcomes.
Once an owner undertakes that exercise, he or she will know the answer to the two crucial questions in any exit: Where do I want to be, and how do I intend to get there?
Mark Abell is senior vice president and SBA division director at NBH Bank, serving clients through Bank Midwest, Community Banks of Colorado, and Hillcrest Bank.