Successful Succession: The Four Components to Consider When Selling a Business

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January 5, 2012
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On January 1st, 2011, America’s Baby Boom generation began to turn 65. Roughly 10,000 boomers a day will pass this milestone birthday over the course of the next two decades, with many making plans to sell their businesses and enter retirement. As U.S. markets recover, baby boomers retire and the trillions of dollars in corporate and personal balance sheets continue to earn negative real rates of return, now is a good time for many to consider succession planning in order to sell their business.

Consider this equation:

  • Private companies make up nearly 60% of the country’s $15 Trillion Gross Domestic Product (GDP).
  • Over 95% of all companies are private.
  • Most private business owners begin thinking of either succession or transition of their companies by the time they reach 65 (the first wave of boomers turned 65 this year).
  • There is an estimated $2 Trillion in cash on corporate balance sheets.

Add each of these components together, and they equal an exponential increase in merger and acquisition (M&A) activity centered mostly in the middle market sector.

At Balentine, we have a long history of working closely with individuals and families who either currently own or have recently sold their operating companies. Through the course of this work, we have discovered that many entrepreneurs are ill-prepared to sell their business, often failing to fully formulate an exit strategy. A good exit plan provides a roadmap for both the sale of one’s company and one’s future once that company is sold. However, despite the fact that 96% of boomer business owners agree that an exit strategy is important, a 2008 study revealed that only 13% actually have a plan in place. For entrepreneurs who typically have a disproportionate amount of their wealth tied up in their businesses, this can be catastrophic.

The creation of any good plan begins with the consideration of four important components.

  1. Measure What Matters. In today’s 24/7 news cycle, we are bombarded with constant noise. As entrepreneurs consider selling their companies, it can be particularly challenging to sift through that noise to determine what factors influence market cycles, your company’s value and ultimately, when you should sell. Do not get distracted by global disinformation if it does not affect your business. Be realistic about the valuation of your company, and don’t let emotion dictate process. A good team of advisors can help you realistically and logically determine what factors matter most for your specific situation.
  2. Understand the Substitution Effect. Are profits from your company producing better returns than the current marketplace? If so, you may be better off keeping your company for a few more years, until markets improve and offer more robust returns. Talk with your investment advisor about what sort of returns markets can realistically offer from today’s “starting point” and then begin a dialogue about the best time to invest the proceeds from the sale of your company.
  3. Seek Expert Advice. Seek counsel from reputable merger and acquisition firms who have experience working with firms in your industry and who understand the value of your company. Many business owners make the mistake of trying to sell their business on their own. Consequently, they often only talk with one buyer. Multiple buyers ensure a more competitive bidding environment, typically resulting in a more favorable sales price. A good M&A advisor can play an important role in this process. From helping position and market your business to a diverse set of qualified buyers to ensuring that negotiations go smoothly and avoiding situations where a single buyer may have issues of their own, a good M&A firm should help with a range of important issues.
  4. Invest Wisely. Finally, once the sale of your business is complete, be cautious of financial providers who encourage you to place the proceeds from the sale of your company entirely in the market. Investors should keep at least 1.5 to 3 years of personal spending needs on hand. All too often, investors abandon a sound financial strategy when markets become volatile, because of a lack of liquidity and an inability to meet their spending needs. An investment plan that keeps cash on hand protects an investor from being forced to remove money from the markets to meet those needs when there is an increase in volatility and markets turn negative.

As was stated in the equation above, as increasing numbers of baby boomers and business owners make plans to sell their businesses, it is important to develop a process to take you from your initial decision to sell through to a successful and well-funded retirement. With a team of trusted advisors, a business owner and his or her family members should enjoy the fruits of their labor without succumbing to the spoils of improper planning.

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