nly 25% of all business owners are successful in selling their business. Why is this? It isn’t a lack of planning. No, the reason is that they wait too long – way too long. It is estimated that only 15% of all business owners have done any kind of planning. This is startling, given the fact most business owners are relying on selling their business as a major part of their retirement plan.
It isn’t your fault. If you are like most business owners, you didn’t go into business thinking about how to cash out. You had a passion and wanted to chase it. Before you knew it, you had a business requiring your attention and time. Eventually, you will want to leave your business and maximize the profits from the sale of the business.
Let me explain why your business might not be worth as much as you think it is and give you a few examples of how to completely turn around the situation to greatly improve the outcome.
Most business owners can tell you if they have a profit and if there is money in the bank account. While these are important to know, most business owners don’t have a firm grasp of the important numbers they need to know and how to use those numbers to improve the value of their business and prepare the business for sale.
Having a general understanding of a few critical metrics can be a valuable performance tool and aid you in improving the value of the business. Such metrics as growth rate of cash flow, working capital baseline requirements, and being able to identify the sources of gross revenue can alert you to problems and opportunities impacting the value of your business. Once you know what affects the metrics, you will gain an understanding of how value is impacted.
When I met Mary, she wanted to sell her business but didn’t know what it was worth. Mary had no problem finding and acquiring new customers. They were the market leader in their industry and geographic market. When asked some basic questions, she could tell you how much money the business had made this year, how much cash was in the bank, and the bills were paid. The business appeared in good shape, in her mind, and she could not tell me why the business was not growing revenues year over year (was stagnant). After asking her a few specific questions, she realized she was not looking at the business from the correct perspective. What she needed was the ability to look at the business as someone from the outside. She needed to be more aware of the what the business was doing. Specifically, how it was positioned in the industry, a way to monitor key elements, and a plan for future growth. In just our first session, Mary was armed with knowing the proper metrics, what affected them, and how to change them. She could now make a positive impact to the value of her business. Having this knowledge, she was able to increase the value of her business from $700,000 to $900,000 in less than one year. Mary was shocked that she could increase the value of her business by $200,000 in such a short time that, Mary decided not to sell the business. She was looking forward to the future of her business and set a goal of reaching a value of $2 million in the next three years. It has now been three years. With my help Mary exceeded her goal - the business is now worth $2.3 million.
Mary has expressed how much fun the past three years have been and is now ready to sell her business.
This causes you, the business owner, to get in the way of your own business. It is difficult to grow your business and impossible to sell your business if...
When you have a business that is not reliant on the owner or another key person, the business value and pool of potential buyers increases. Sometimes we need to step aside and look at the business from a different perspective. What would the business look like if you were not there? Who would you need to hire and what duties would be their responsibilities? What systems would need to be documented?
When I met Murl, his business was generating close to $2 million in gross revenue. That was the problem. The business had experienced zero sales growth for the last 3 years. Combine the zero sales growth with the fact that Murl was the entire sales team, relates to a subpar sales price. Murl was frustrated, as he considered himself a good sales person. In my conversation with Murl, it was discovered he was the sole sales person and performed much of the quoting. In addition, he had people on staff who could also do sales and quoting. Once Murl understood he was the business and he was what was holding it back, he made a few changes. We helped Murl identify which members of his staff had the skills to generate sales. With this information and our help, he reorganized the business tree, reassigned duties, evaluated pricing and product offering, and documented systems. With these changes in place, he was able to refocus his attention in the business. In eight weeks, he was on track to break $2 million dollars in gross revenue. In the first full year after implementing the changes, the business generated $3 million in gross revenue. In the second year, the business finished just under $4 million. By the time Murl’s business was sold, he was doing just over $6 million in gross sales and he had shifted all sales and quoting to his sales team. If we had sold Murl’s business without making any changes, it would have sold for $800,000. With the changes, it sold for $4.3 million. Just removing Murl as the sole sales member, and not factoring in the increase in sales, the value increased by $400,000 to $1.2 million.
Changes to the organizational tree, reassigning duties, reviewing pricing and product offering, and documenting systems, allowed Murl to direct his skills, talents, and knowledge where they were better utilized. Sales was no longer dependent on Murl and his capacity as an individual. Sales began to increase, and he had a business he could cash out of at any time.
Without identifying your motive (reason), you cannot create a proper transaction structure. Without the proper transaction structure, taxes could eat as much as 50% of the value of your business. Stated another way, you receive much less after-tax net proceeds than if you have identified your true motive for selling your business.
Instead of rushing into a transaction with someone who has met your price, stop. Consider your motives for selling or transferring your business. Only by analyzing your true motive, can you then identify the options available to you in the structure of the transaction to maximize the net proceeds and retain the value you created in the business.
When I was first introduced to Paul, his business was at the top of its game. Revenue grew every year, the business could run without him, and they had no problems financing future growth. Paul was 61 years old and had decided it was time to retire. Not until he identified his true motive in selling the business, could a proper transaction structure, to maximize net after tax proceeds, be identified. The challenge was to structure a transaction to minimize taxes, reward the employees for their hard work, and for Paul to retain control of the business until the transaction was completed. Paul’s main concern was maximizing the net after tax proceeds, and not receiving the highest price. In six weeks, we developed a plan. One year later, the business was sold to a private equity group for $8.3 million. We saved Paul more than $530,000 in income tax compared to if he had completed a straight-out sale and done no planning. Paul is now fully retired and comes back to do consulting work for the business on an “as needed” basis.
The best methods are not always the traditional methods. Selling your business is not a small event regardless of how big it is. You should take your time to identify your true motive for selling or transferring the business. This will have a direct impact on the value of the business and realized net after tax proceeds. Only when you have identified your true motive, can you comfortably cash out of your business.
When you leave your business, will it be on your terms? If you do nothing else, complete the 10-minute Marketability Score to determine the level of marketability for your business. You will receive an indication of value, how the business compares to the rest of your industry, top three areas the business could improve its value, and how much value you are missing.
Contact me today to find out how I can help you maximize your business’s net worth and get on the path to cashing out.
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