Guest commentary: Your business is worth millions — Are you really ready to sell it?
By Bryan Esarco
The consideration of owner readiness seems like a basic concept, but it can easily be overlooked in the excitement of valuation. In my experience, I’ve seen deals fail because the owners bypassed exit planning, including the necessary step of assessing the owner’s readiness. The reality is that confirming the owner’s willingness and readiness to sell should be the very first consideration.
If we don’t have full commitment to selling the business, then, as the deal progresses, the likelihood of the owner/seller suddenly having “cold feet” and canceling the transaction increases significantly. The result is a failed transaction, wasted professional fees and a loss of time for the buyer in their acquisition search.
CASE STUDIES ON OWNER READINESS
I have two cases that demonstrate how failing to leverage an exit planner and test owner readiness resulted in failed deals.
• A tale of two sisters: In the first case, two sisters were operating a business together. One of the sisters was ready to think about retirement. The conversation between them quickly moved to deal setup, transaction timing and how it might be financed.
When the retiring sister was confronted with the reality of leaving the business, she put the brakes on and decided now wasn’t the time.
If the almost-retired sister had a more detailed conversation with an exit planner prior to the escalation of deal structure, we could have confirmed her readiness, and a deal may have still been completed.
Skipping the owner-readiness discussion resulted in panic, anxiety, lack of commitment and fear in the exiting sister’s mind, and it was just too much to allow her to move the business transfer forward.
• Money isn’t everything: In the second case, a business owner was approached by a buyer to acquire his business. The business owner wasn’t looking to sell, but out of curiosity entertained the conversations with the prospective buyer.
The owner had been working in the business — not on the business — for many years and he was growing tired of the day-to-day grind. The conversation with the prospective buyer seemed worth exploring.
Very quickly after the initial conversations, the buyer provided a letter of intent with a purchase price that far exceeded what the owner ever thought he could receive for the business.
The transaction moved forward until the final days before closing, when the reality of what was happening hit the owner hard.
Ultimately, the owner decided that even at that great valuation number, which would have been life-changing, it just wasn’t time for him to walk away. It turns out, the owner was more curious than committed to selling, and that spiraled into a deal destined to fail.
SOUL SEARCH BEFORE SALE SEARCHING
So, are you ready to sell? Until the owner/seller is committed to selling, the risk of failure is heightened. Here are some questions and considerations exit planners address to assess the owner’s readiness:
• Have you considered the steps to take to exit, such as financial needs, departure timelines, succession plans and value-based goals?
• Have you considered the current value of your business? If the business valuation does not meet your financial expectations, have you created a plan to increase its value before your departure date or retirement?
• What is your exit timeline? Have you determined the steps to prepare for an effective exit in that timeframe?
• Who is your successor? Are they a family member, key employee or a third party? Have you considered transitioning to an employee stock ownership plan (ESOP) or employee ownership trust instead of a sole successor?
• Is the business capable of running without you?
• Have you considered the tax consequences of the sale and created a tax plan?
The above list is not all-inclusive, but it does focus on key areas business owners should consider. Something I say to buyers on day one is, “When will you exit and what will the business value be then?”
EXIT PLANNING STARTS EARLY
An exit plan isn’t just for when you are ready to exit; it should be part of the strategic plan from the day you start or acquire your business.
Having an exit-ready plan may help convert unexpected solicitations into successful deal transactions. When business owners have a better sense of their goals and have thought through the exit process in advance, they are better able to make mindful decisions related to purchase offers.
Unless you are ready, there will not be a successful sale. Even worse could be selling when you are not ready and experiencing seller’s remorse.
Assessing your sale readiness as an owner and understanding how to prepare for a sale are two critical first steps in your business exit journey.
If you’re receiving buyer solicitations or have been thinking about retirement, connect with an experienced exit planner who can help guide you through the process.
• Bryan Esarco is the vice president of business planning solutions at UMB Bank. This article is for educational purposes only. You should consult with your professional advisors before making any decisions.
