I played a lot of baseball growing up. One of the best pieces of advice my coaches gave me was this: “Guy, don’t step into the batter’s box without a plan.”
My coaches wanted me to exude confidence whenever I stepped into the box to show the pitcher I wasn’t intimidated. More importantly, they wanted me to know what I planned to do before every pitch based on who was on the mound, how many runners were on base, how fast those runners were and where the defense was positioned in the field. Having a plan prepared me for certain pitches and where to place the ball based on where the pitcher liked to throw. When I stopped hacking away at whatever the pitcher served me, my batting average increased significantly.
It’s the same when a client tells you they want to sell their business. If they go to market without a careful plan and take whatever offer the first buyer pitches them, they’re just hacking away and bound to be disappointed by the outcome.
Since you only get one strike (not three) in our business, here are five key areas in which you can greatly help the business owners you work with get financially and psychologically ready to exit:
Emotional Considerations
The psychological and emotional aspects of exiting a business are often underestimated. Many business owners have a deep personal attachment to their companies and haven’t thought about what their lives will look like post-exit. If they’re not prepared, selling their business could be more like a death in the family than a joyous event. They can feel a total sense of loss and direction. While the risks and stress of running a business have been extinguished, part of them loved the adrenaline. That’s a huge void to fill, especially when they suddenly have 50, 60 or 70 hours a week of free time on their hands. Some owners think they can fill the void with travel, golf, new hobbies or other sports. But eventually, the allure of those endeavors pales in comparison to the rough and tumble world of entrepreneurship, and they get bored easily, give up on life or return to the business. In some cases, they might start another business. But nothing will ever fill the hole in the owner’s heart.
Make sure the owners you work with understand that if they can’t set aside their passion for the business, they’ll have a hard time coping with life. Their marriage and relationships with children, grandchildren and friends may suffer. Help the owner think through their options and identify activities that satisfy them and give them a sense of purpose. In many cases, they might find fulfillment in consulting, coaching, mentoring or volunteering. Regardless, they should give thought to these activities and find a way to diversify their interests before they sell.
No More Company Piggybank
I’ve seen many owners (and their advisors) forget to factor into the sales price how much more their personal expenses will increase after they exit the business. Suddenly, the owner must start paying out of pocket for items such as their cars, boats, country club memberships, travel, concert tickets and dining expenses instead of running them through the business.
As an advisor, you can lend significant value by helping owners understand their real day-to-day living expenses post-exit. Doing so well in advance of the sale will help the owner come up with a minimum sales price they can accept to support their lifestyle post-exit (post-piggybank).
Timing Considerations
Optimal exit timing depends on multiple factors, including market conditions, business performance and personal readiness. Timing can be more complex than financial considerations.
Make sure the owner understands their offer may not be an all-cash sale upfront. It’s more likely to be cash and a note, and the note may be an earnout. When the deal is finally inked, buyers expect the business to remain at least as successful as it was when the founder was running it. They need protection in case the business falters due to factors such as the economy, new competitors, litigation, key employee departures or technology disruption. This can change the deal by contract and significantly reduce the owner’s total payout.
You want to help the owner with a contingency plan so they don’t rely 100% on the sale proceeds for their financial security. We often see this with owners who’ve invested significant personal capital into their businesses. They may have 90% of their net worth tied up in the business, hoping to free that money up when they sell. As the old saying goes, “Hope is not a strategy.”
Instead, a contingency plan consists of two elements. First, it’s about helping the owner build sufficient assets outside the company so they have enough income to live on if the company has cash flow problems or if the sale ultimately falls through. (Remember, three-quarters of businesses never sell.) The second element is a life plan. Help the owner get very clear about their life after the business. The sooner they put a plan in place, the better their chances of living a productive and active retirement life. Hint: It will take a lot of tweaking and tough conversations with you to get the life plan right.
Operational Readiness
Make sure your clients know that preparing a business for sale or transition can take years. This includes streamlining processes, building a strong management team and reducing owner dependence. Encourage your clients to think about how they can make themselves “operationally irrelevant.” Can they be away from the business for weeks at a time and still have everything running smoothly? Getting to this point isn’t easy, but it will do wonders for the owner’s stress level and greatly increase the company’s valuation.
Unfortunately, most business owners aren’t able or willing to make these tough decisions. This is why SCORE data finds that only 20% to 30% of businesses that go on the market eventually sell—and even fewer sell for what the owner hoped they would fetch. That’s where you come in.
Legacy Planning
Owners often care deeply about preserving their company’s culture, values and impact after their exit. This goes beyond maximizing financial returns. It isn’t unusual for the owners to be caught off-guard when the sale hits. When the day of departure comes, they’re leaving behind a huge part of themselves. They’re prone to asking themselves: “What difference did I make in this life?”
Unfortunately, for many owners, the answer is de minimus. Because of their relentless focus on the business, they may have broken marriages, poor relationships with their children and an emptiness they filled with the company. When the company is gone from their life, there can be an even deeper emotional void to fill.
Pre-sale legacy planning allows you to help the owner identify the causes and organizations they most want to help (with money or volunteer time) and how much of the sale proceeds they want to go to children, grandchildren or other family members. You can also help the owner determine whether their beneficiaries are mature enough to handle their windfall in its entirety or if it should be parceled out in stages as they get older. These decisions all have tax consequences. Addressing these issues well in advance can give the owner significant peace of mind, better timing and deal terms, and more clarity about the minimum.
Dr. Guy Baker is the founder of Wealth Teams Alliance (Irvine, CA).