The Smartest Business Owners Never Leave Money on the Table
Posted: October 16, 2022
Have you heard about the “age wave” that could affect the value you realize for your business when you decide to monetize the wealth you’ve created? Two thirds of private business owners are baby boomers, and their average age is 65, representing over 700,000 Canadian businesses. According to BDC, 49% expect to exit their business within 5 years. That could be good news if you’re looking to buy a business, but the market is about to get much more challenging for owners looking to exit.
Unlocking the wealth in a business is no trivial affair given that 80%-90% of most owners’ financial assets are tied up in their business. Owners are banking on their ability to monetize this wealth to ensure their financial security and lifestyle once they exit.
However, historical transition rates suggest looming issues for the unprepared: statistics show that only 20%-30% of private business transitions are successful. Poor transaction success, high levels of owner dissatisfaction, and low levels of survival for family-owned transfers all threaten retirement plans.
Despite that backdrop, nearly 80% of owners have no written transition plan, and nearly half have done no planning at all. Not having a considered exit plan will close doors to value maximizing opportunities and available tax saving strategies.
Here are five thoughts business owners should keep in mind when trying to optimize value on what they have created.
A successful exit strategy ensures a business owner is financially prepared, maximizes transferable business value and provides a plan to answer the question, “What next?”
There are several factors that come into play.
First, an owner must understand their business and their personal objectives.
Your personal objectives and needs are key inputs to correctly setting your personal expectations and financial plans. Understanding your wealth plan and what must be achieved out of the business sale to enjoy it, represents your bottom line for negotiations.
Understanding that there are different phases in the getting-to-cash process is important, too. The planning phase to maximize value can take up to three years, while preparing and executing the final transaction can take up to a further year. Even after the transaction is completed there may be contract terms that need to be fulfilled.
Having a written plan covering these stages, as well as identifying goals for pre-sale value acceleration, will help chart a course for the owner and give other stakeholders something they can buy-in to.
To optimize value in the sale of a business, an owner needs to look at his or her company through a value lens. This is likely to involve “reframing” their approach from a perspective of purely maximizing profit to one of maximizing value.
To do this an owner needs to understand the value of the business today and what drives that value. The quicker one gets comfortable with the fact that this is not just about sales and growth in profit, the greater the likelihood of having a successful sale.
The more time one allows for “value acceleration” work to be executed, the better the prospect for maximization and creating a return on investment.
It is important to understand that more than 80 percent of the value of a company lies in intangible assets and goodwill (often off-balance sheet). An advisor team can help an owner identify and measure the components of such assets.
In order to track progress in accelerating value pre-sale, it is important to institute a measurement framework where the unit of measure is enterprise value. Having the value scores for the components of these assets allows an owner to create a targeted plan of improvement around the key drivers of value.
There are various measurement tools, ranging in sophistication, that enable owners to identify winning strategies and transform them into genuine results (e.g. Value Builder and Value Opportunity Profile). Measuring the positive results from improvement actions will help deliver desired outcomes.
Remember the maxim: “What gets measured, gets done!”
There is a defined sales process that occurs when selling a business.
The sales agent (broker or investment banker) invites a group of prospective buyers from a wide variety of sources to engage in the sales process. The agent stages the interaction to funnel down to the buyers who have demonstrable interest and qualifies their ability to execute the transaction. The goal is to orchestrate competition and create “deal tension” to optimize bids with attractive terms.
Some key sales documents, which the market expects to be available when engaging, will be employed in the process. An owner will need to have significant input in their preparation and justification. Having these documents available, with supporting information, is critical for deal momentum and navigating due diligence.
A lawyer skilled in M&A will also draft and provide negotiation support for various legal documents critical in arriving at negotiated price and terms.
There are a number of key roles that form the backbone of an aligned exit-planning team.
First, there’s a quarterback (the “Exit Planner”) who can help an owner build, orchestrate and implement a plan. Critically, this position will take the business through a process of value acceleration and ensure that the business is transferable and ready for sale.
A personal financial advisor helps compute the minimum number that an owner needs to achieve from the sale of a business in order to fulfill his or her lifestyle wants. This provides a bottom line.
A business tax and legal advisor helps structure business assets so that what is sold is separated from assets not being sold and will organize to minimize tax on net proceeds.
Finally, a transaction advisor will help the owner organize and orchestrate the sale process, which requires independence and skill.
For a business owner, early planning, informed navigation, and careful execution of the exit process can mean the difference between maximizing the value of the business or settling for something less than they have dreamed about for their retirement.