It’s been estimated that the owner of a typical small- to medium-sized business has up to 90% of their personal net worth tied to their business. Their retirement plan is simple: Sell the business for a whole lot of money and live off the proceeds. Problems can arise for a variety of reasons when the business owner is ready to retire and the business isn’t ready to sell.
In many cases, the business owner has underestimated the amount of time it will take to prepare the business for sale, and/or the length of time it will take to conduct an effective marketing campaign to find the right buyer and negotiate the best price and terms and actually get the deal closed. In other cases, the owner is simply unaware of the steps he/she might take to maximize the attractiveness of the business, and ultimately its market value.
In the current economic climate, the buyers are also getting pickier and the successful seller may need to spend even more time and effort making their business saleable.
Experts suggest that business owners begin as much as 3 to 5 years – and in some cases longer – prior to their ideal “last day” in the business. While this might seem excessive, there are several good reasons for such a lengthy planning and preparation period. First, more sophisticated buyers will insist upon reviewing 3 – 5 years of historical financial statements, preferably reviewed or at least compiled by an outside accounting firm. Larger & more sophisticated buyers may require audited financial statements. If your business is not doing this now, it can obviously take several years to build up this well-documented financial history.
Furthermore, a business owner would be wise to anticipate some of the common issues that often show up in due diligence that will lead the buyer to either reduce their offer, or walk away from the deal altogether, and implement changes to eliminate or at least minimize them. Some common concerns are: Excess Customer Concentration; Lack of Management Deep; Threat of Technical Obsolescence, and Overdependence Upon the Seller
Additionally, a business owner might choose to implement several changes to improve the proven cash flow of his/her business, since this is so important in determining the ultimate market value of the business, and these can take time to implement and bear fruit.
Likewise, the owner of a small- to mid-sized business should allow about 1 year and in some cases substantially longer to conduct an effective marketing campaign to find the right buyer and negotiate the best price and terms, and actually get the deal closed. Finally, many savvy buyers will want the seller to stay on in a management/consulting role for six to twelve months, and in some cases much longer.
If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a complimentary consultation with us, have them contact me, or any of the M&A professionals at www.bradwaygroup.com.
By: Mike Ertel, Transworld M&A Advisors