Who Should Fill Your Shoes?
You’ve spent years building your small business. Not only have you retired all your debts, you actually have made a fair bit of money for yourself. After all the hard work and long nights, your company practically runs itself.
There’s only one thing left to ask yourself: Are you still the right owner for your business now? It’s a question that Kevin Lindsey, founder of the DVS Group, often poses to his clients. The firm specializes in mergers and acquisitions involving the lower middle market.
This is a useful question to consider because it forces entrepreneurs to really think about the long-term trajectory of their business—and their place in it. Some owners realize they don’t possess the necessary drive to keep their companies competitive.
As a result, they have to start thinking seriously about exit strategies, a task that many avoid until it’s too late.
“Historically, leaving your business is kind of like estate planning,” Lindsey said. “Everybody wants to put it off as long as possible.”
The process usually leads to the other big question that Lindsey likes to ask clients: If you’re not the right owner for your company going forward, who is?
Family Members or Current Management
Among the entrepreneurs Lindsey has encountered, about 60 percent plan to transfer their company to family members or sell
to the existing management team. How often do those kinds of transitions actually happen? About 5 percent of the time.
Those exits are harder to pull off than people might expect. For one thing, they take anywhere from five to seven years, and most small businesses don’t begin the process early enough, Lindsey said.
Many family members or existing managers just aren’t suited for ownership, even if they have been with the company for several years. They could excel at what they do, but lack the critical skills that ownership demands.
The management team also might not have the monetary wherewithal to purchase the company. The owner would be required to finance the sale—and that’s something many owners don’t want to do.
If selling to family members or employees isn’t an option, business owners can seek out third-party buyers. This kind of transition usually takes one to two years, though you’ll need to make sure your management team is onboard.
Owners also should understand there are basically two kinds of third-party buyers, Lindsey said.
Financial buyers will look at how much cash your company can generate versus the debt they will have to take on. This type of buyer focuses on the numbers.
Strategic buyers, on the other hand, might be someone in your own line of work or in an adjacent industry. (For example, a moving company that acquires a storage business.) These buyers are going to be looking for synergies—ways that your business can be used to complement and expand their range of services and their client list. They’ll look for a way to make 1+1 equal 3—and as a result, they might be willing to pay more.
Be Ready to Work
Whatever path you choose, be aware that exiting your business is going to take time and work, especially when it comes to due diligence.
Buyers will want to see clean, detailed financial reports on your company, and they’ll have a long list of other questions, too. Lindsey recommends asking a trusted attorney or an investment banker for a list of the due-diligence items that they usually investigate during a business sale.
Pulling all that data together could take weeks or months. But the effort will pay off when you have a buyer who pops up and wants to move quickly toward a sale. A lot of business sales stall out, Lindsey said, because the seller doesn’t have all of the necessary information ready.
“Time is the biggest killer of transactions,” Lindsey said. “They just get worn out. They’ve got other things to do.”
Are You Ready for the Flood?
Entrepreneurs who are in the Baby Boom generation need to take exit planning seriously because the next 10 to 15 years are going to be a buyer’s market for businesses. About 400,000 to 700,000 companies are expected to change hands each year.
If owners can’t demonstrate their companies’ value and differentiate them from all the other businesses for sale, they might be forced to accept a lower price—or simply shut their doors.
Those who do their homework now, even if they plan to stay in the company for another 10 years, will increase their odds of success when it’s time to go.
“Being prepared,” Lindsey said, “is the absolute best way to sell to the best buyer, on the best terms, and being able to sell in the least amount of time.”