“I never worry about action, only inaction” – Winston Churchill
Churchill might very well have been the “un-procrastinator”. Although he was plagued by doubts many times in his career, he never let such doubts interfere with the need to make a decision based upon the best available information. He made his share of mistakes, but he also realized that failure to make a decision is invariably the worst possible course.
Business owners tend to be “take the bull by the horns / action-biased” persons. However, many are reluctant to begin the Exit Planning process even though they recognize that their exit from the business is inevitable and it is much better to plan in advance for such an exit. Let’s briefly review the advantages of advanced planning.
When selling to a Key Employee(s) (KE), the most important factor in getting financing for the sale is for the KE purchaser to have a proven track record in successfully managing the business. A typical plan has the KE acquiring a small minority interest (5%-10%) over three to five years with increasing management responsibility. At the end of this period, the KE is in a good position to get financing to acquire most of the rest of the Company. This way the owner can get 70% – 80% of the business value at closing in cash and minimize the risk of holding a long-term note for most of the business value. But this transition period must be well planned. If there is more than one KE, then a clear management hierarchy must be established and the employees must demonstrate they can work well together. If one KE, he or she must demonstrate that they can continue to generate the cash flow that will be necessary to service debt.
Third Party Sale – the Magical Buyer
It is very common for my clients to tell me that there is someone who is interested in buying their business. The prospect of this “friendly” buyer stepping up and purchasing at a “fair” price is extremely appealing. The owner doesn’t have to do the hard work of getting their business ready for sale, go through the anxiety inducing marketing process, and deal with employee retention issues. Sometimes these “friendly” purchases work out, but most of the time they don’t. The friendly buyers are usually looking for a bargain price and if there is only one potential buyer, the buyer has all the negotiating leverage. Some owners are willing to sell at a steep discount, but most are not. Getting fair value for your business requires planning that will take at least one to two years. Do the work and avoid the disappointment of waiting for the Magical Buyer.
Failing to proactively plan has high costs. It will at least delay, if not foreclose completely, the possibility of a successful exit. Jump over the hurdle of inertia and get started. You will begin to feel a lot better about your future.