There are five areas where business owners, who want to both survive in today’s economic climate and emerge from it poised for growth (or sale), can focus their energies. Those areas are:
• Preserving and Protecting Value
• Identifying Value and Cash Flow
• Creating Revenue
• Creating Value
• Excuses Owners use to Avoid Exit Planning
Most owners are currently waist-deep in the first area: cutting expenses and minimizing risk and taxes in order to protect their companies. For that reason, we kick off this BEI Educational Series with a discussion of each area by focusing on the final one: creating value. While this may seem exactly backwards, it is not. While owners are busy cutting expenses and minimizing risk and taxes, they should be keeping an eye on their endgame: someday leaving their business for an amount of money that will enable them to live the rest of their life in style. The actions you and your client take today must not only preserve value, but must ultimately create value for a future owner.
Even the most pessimistic among us acknowledge that these tough times will not last forever. We may never return to the days of an over-heated M&A market, but once credit loosens and confidence returns, good companies will sell. Will your client’s company be one of them?
Demographically, we know that the future holds many more sellers than buyers. What we don’t know is how this crisis has affected that imbalance between the number of sellers and the number of buyers. We suspect that the market’s inability to support business sales over the past few months has put the sale plans of many owners on hold. We also suspect that many owners are not having a whole lot of fun getting lean and mean. If those two assumptions are true, when this market turns around, there will be a host of owners scrambling for their exits. If (or when) that happens, only the “best” companies will sell.
What can be done today to prepare for tomorrow’s scramble? Re-examine and realign your client’s objectives to adjust to today’s realities.
Assuming, as we do, that the most effective strategies for dealing with crisis are those that address short-term challenges and support long-term goals, let’s understand the long-term goals or your business owner client:
Most owners have a preferred successor in mind: a child (or children), a key management team, a third party or an ESOP. We encourage all owners to re-examine their choices. You may, for example, feel that your only viable exit strategy for the owner is to just not leave the business; that a sale to an outside party is just not in the cards — now or in the future. That feeling may very well not be accurate, especially given the changes in the Small Business Administration loan programs promoted by the Obama Administration.
As we mentioned above, the current economy has forced many owners to postpone their exit dates. We encourage you to talk candidly with your clients about how to re-set their exit clock including in that discussion the fact that for most owners, their sale dates do not equal their retirement dates. (Most buyers require sellers to work past their closing dates to ensure that the company continues to perform.)
Most owners have some idea of the amount of money they need (from both the sale of their businesses and from other investments) to fund a comfortable “life after sale.” (If your client does not know that dollar amount, a financial needs analysis is required today.)
What your client may have overlooked in their focus on surviving today’s challenges, is that both the amount they can expect from the sale/transfer of their company and the value of their other investments have changed. Every owner should be working closely with his or her financial advisor not only to re-assess the make-up and performance of non-business assets, but also to establish a new benchmark of the value of their business today.
In addition to your client’s desires about successor, departure date and definition of financial security, we think they should include long-term growth in their short-term decisions about expenses and risk. As they prune expenses – especially in management – make sure those cutbacks don’t prevent new growth. This can only be done if your client has a good sense of where they want to take their company in the future.
Try to keep in mind that future owners (of whatever stripe) will not be interested in investing millions of dollars in a company that either does not have a motivated management team or in one whose management team is not willing to stay on after the sale.