The most recent edition of a local business newspaper contained a full-page ad about how business owners can achieve a smooth ownership transition. The ad was placed by a bank and featured their expert who helps owners plan for transition.
There’s only one problem. This article, like a countless number of virtually identical articles before it don’t give the owner one single piece of advice about how to actually plan for and execute a transition.
Instead, every one of these articles recite the obvious. They list the options for what an owner can do with his/her business when it’s time to leave. They can…
- Sell the business outright in either an auction or a private sale to another company or senior managers
- Transition the company to next generation family members
- Set up an employee ESOP
- Close the business and liquidate the assets (most “experts” don’t list this option because they derive no benefit)When the owner wants to retire/quit/get out, these are the only options. However, many experts also count two additional options in this group which really aren’t options for the owner who wants to be done with the business. More and more, that’s what we at Capitus hear that owners want to do. So many owners state that they are tired and/or burnt out and they simply want out.The other two options often counted as exit strategies include:
- Recapitalize the business. This is bank-speak for loading debt on the business and taking that cash out of the business. But, the owner still has to run the business, now with more stress to cover the bank debt payments.
- Partner with private equity. For the owner who wants to sweep cash off the table and stay in the game or who has a longer time horizon for retirement (usually 5 years or so), this can be a great option. This is not, however, an option for the owner who wants to exit ASAP. PE guys will want the owner to stay as a key condition for doing the deal. This is also rarely an option for companies with under at least $1 million in EBITDA, usually more.
Now, what the experts don’t tell you but should:
- They actually won’t help you. 99% of bankers have zero, zip, zilch, nadda experience actually running companies. They’ve never been a CEO. Never scrapped and clawed to make payroll. Never laid awake at night worrying about cash flow or inventory levels. They don’t dig in and get their hands dirty working side-by-side with you to figure out how to prepare the business for sale.
- Selling or transitioning a company is an immensely time-consuming and stressful job. In fact, it is a full-time job in and of itself. Since most small companies are strapped for manpower, this job falls almost solely on the owner.
- Selling a company is entirely different from selling the products created by the company and this job requires a very different skill set.
- It takes a village. So many owners want to be penny-wise and pound foolish by managing the entire process rather than invest in the use of experts. By doing so, they almost always leave money on the table. We’ve seen cases where the owner/seller could have reaped a 10 to 20 time ROI on the cost of hiring experts and realizing a higher valuation. Equally as important, someone needs to quarterback this group of experts to keep them all on the same track and timetable. Most owners don’t have the time or experience to do this.
- It takes at least a year and, ideally, several years to properly prepare a company for sale or transition in order to maximize value or optimize the transition process.
- There are experts who are ready, willing and able to literally roll up their sleeves and work side-by-side in the business on a regular basis –even a daily basis if necessary– to help a business owner achieve his/her goals. This also allows the owner to continue to focus on running and growing the core business. Too many times, the owner who is trying to sell his/her company is forced to take his/her eye off the ball at a critical time. They can easily end up seeing a business decline resulting in reduced value.Selling a company is a demanding and emotional process.
Owners deserve to take that exit or transition journey with trusted advisors who can work side-by-side with the owner, relieve the workload and stress and provide an objective sounding board.
Note: If you have an interesting and/or educational CEO story of Head Noise caliber, write to me at firstname.lastname@example.org. I’d love to speak with you and share your story in my Head Noise blog. You can tell your story either on the record or, without attribution.
Cameron Bishop is a partner with The Capitus Group. The firm provides comprehensive business value enhancement and transition strategy solutions. Partners and Advisory Directors comprise an experienced team of business professionals who have successfully owned, run, grown and sold companies. Capitus utilizes proven value enhancement and risk reduction techniques to enable superior transition options.