If you own a business, you plan to sell it sometime in the future. Unless the sale will be to a family member for a nominal amount, your expectation is probably to gain a substantial monetary reward for all your years of hard work, risk, and personal sacrifice to build a valuable enterprise. Unfortunately, the odds are not in your favor.
According to Department of Labor statistics, of all the private companies put on the market for sale every year in the U.S., only 17% actually sell. This is especially likely when the sale occurs only after the owner has become increasingly burned out over the course of many years and has allowed the business to decline.
There are many reasons for this statistic, but they all boil down to one—the lack of a well-thought out and well-executed Exit and Succession Plan.
A well-designed E & S Plan builds in the multiple components essential to making the business attractive to a prospective buyer, including the leadership and expertise needed to continue to run the firm. The lack of any key components can be a deal-killer. Some buyers will want to run the business themselves, but when the buyer is an equity firm, it may require that a good management team is already in place, including a replacement for the owner who has functioned as CEO or President.
Do not think that an E & S Plan is irrelevant just because you want to keep the business in the family and pass it on to an heir. There are two reasons why this is a mistake: 1) heirs may change their minds and decide they would prefer a different career and pick up their inheritance later; 2) the heir who takes over the firm may be not competent to run a business. Former owners sometimes have to emerge from retirement to save the firm from bankruptcy to which the heir is driving it. Once they save it, if they can, they are back to square one: find a buyer or competent successor. No wonder that, according to Price Waterhouse, only 30% of family businesses survive into the second generation, and only 12% are still viable into the third generation.
When should you design your Exit and Succession Plan? Serial entrepreneurs and equity firm buyers begin on Day One. The more practical answer for most business owners is to have a plan in place as soon as possible and at least three to five years before your intended sale date.
Why as soon as possible? Two reasons: 1) you can never be sure what the best—or required—time to sell will be, based upon family, health, and economic conditions; 2) most of the elements that go into executing a good Exit and Succession Plan are the same elements that go into increasing your enterprise value. In other words, not only are you more likely to eventually accomplish a sale having had such a plan in place, but the sales price will also likely be significantly higher than if you had no plan! Building substantial enterprise value is a process of several years, not something that can be accomplished in the final six months before retirement.
So how do you get started and do so in a way which does not eat up too much time or resources?
Next month, Mulkern Associates will offer a workshop expressly for business owners to design and produce an Exit and Succession Plan that will build enterprise value and increase your chances of being among the 17% that sell. The seminar will meet for two hours per week for about three months. More details will be forthcoming, and we believe you will be excited by this opportunity that can literally make millions of dollars of difference to you when the day comes for to reap the rewards of all your years of risk and hard work.
Watch for more information soon.