Posts made in May 2014

Why Do 80% of Business Owners Fail to Sell Their Businesses?

Gary Miller

Why Do 80% of Business Owners Fail to Sell Their Businesses?

by Gary Miller

A crisis is looming on the horizon for business owners wanting to sell their companies. Currently, 80% of business owners of small and middle market companies who put their businesses up for sale never close the transaction. The reasons: (1) poor planning; and, (2) over valuation.

With the impending Baby Boomer tsunami, more businesses will be for sale than at any other point in history creating a buyer’s market. This buyers’ market will cause significant competition.  Businesses that do not plan well or over value their companies will be left out in the cold.

Many strategic and financial buyers with significant funds to invest are more cautious and reluctant to pay premiums for companies than a few years ago. Therefore, as a part of your planning process, owners should take these three steps to significantly increase their chances of selling their businesses.

1. Think like a “buyer.” Most buyers want to purchase a company that has the following characteristics.

  • A proven entrepreneurial management team in place who can continue rapid growth and expansion after the transaction closes.  Most buyers do not want to replace current management of the company they are buying.  Doing so adds a risk profile that could endanger the viability of the business going forward.
  • A strong and realistic growth plan to continue value creation through market penetration and expansion, defined market niche and/or acquisitions
  • An ability to produce  significant returns on invested capital coupled with strong positive cash flows
  • A sustainable competitive advantage

2.  Prepare before you go after a buyer.  Attracting a buyer is like preparing for a beauty contest.  Companies that “show best” win “first”.   It takes six to 18 months to prepare your company for the buyers’ market place. Strong preparation could mean the difference between a much higher “selling price” than weak preparation. Strong preparation steps are listed below.

  • Quantify the business value through a third party valuation firm
  • Get rid of obsolete inventory. If your financial records show a higher value than market value, take the write off now so that it doesn’t become an issue for the buyer.
  • Audit your financial records by an independent accounting firm.
  • Strengthen legal and contractual affairs
  • Install and improve operating systems and processes
  • Tell your management team that you plan to sell the company.  Be truthful. Include them in the preparation process. To not do so could scare your key employees (the very ones you need to keep) when a buyer’s due diligence team shows up to begin their due diligence process.  This could trigger your key employees to search for new careers.
  • Create management and key employee long term incentive plans to stay with the company
  • Prepare for buyer due diligence. If you were buying your company, what would you drill down on first, second and so on?  Conducting your own a due diligence similar to a buyer’s due diligence process allows you to discover any “skeletons” before the buyer does. It allows you to correct them or to put the best possible explanation forward to the potential buyer.

3.  Select the right team to help prepare you to go to market.  Assemble a collaborative multi-disciplined team of experts is critical to help prepare you to go to market. Advising you on alternative exit strategies, tax issues, alternative deal structures, preparing you for negotiations are important before a buyer shows up to make a deal. Five key team members are important to your success.

 

  • A management consulting firm with strong business strategy expertise and transaction experience to lead the team.
  • A law firm with significant transaction experience led by an attorney who is a CPA
  • An investment banking firm with deep transaction experience in your industry
  • An accounting firm with major transaction experience to guide you through the tax issues
  • A wealth management firm to help you plan wealth preservation from the transaction. Following these three steps will significantly help you finding the right buyer, at the right time, paying the right price to close the transaction.

Gary Miller is founder and CEO of GEM Strategy Management, Inc., a management consulting firm focusing on strategic planning, growth capital for expansion, value creation and exit strategies for middle market companies. w. gmiller@gemstrategymanagement.com or 970.390.4441

gmiller@gemstrategymanagement.com 

The content of this post is the intellectual property of GEM Strategy Management, Inc. and cannot be copied, reproduced in any form or used without the express written consent of GEM Strategy Management, Inc.

 

 

 

So You're Thinking About Selling Your Business

Gary Miller

So You’re Thinking About Selling Your Business
By Gary Miller CEO
GEM Strategy Management, Inc.
5-13-2014
A time always comes when business owners ask themselves, “Should I begin thinking about selling my business?”  Your success depends on your strategic exit plan, team selection and timing. And, business owners today face four major threats now through 2029 that no other generation has had to face.

First, a demographic tsunami of Baby Boomer businesses is coming on the market from now – 2029. A bit of background will give you some insight into its impact. The U.S. Census Bureau defines Baby Boomers as those born between January 1946 and December 1964.  There are approximately 78,000,000 of them; around 10,000 are retiring every day. Assuming they retire at 65, they will retire at a rate of about 4,105,000 a year through 2029.

Small businesses, (500 employees or less) number 28.2 million as of 2013 (latest data).  Baby Boomers own about 43% of those businesses (12.1 million). Approximately 60% of the 12.1 million businesses will be put up for sale through 2029 (7.26 million). This averages 403,333 businesses on the market each year. Businesses put up for sale between 2008 and 2013, averaged 123,000 per year. One can readily see the tsunami impact going forward — 403,333 vs. 123,000.

Second, it is a buyer’s market over the next 16 years. Transaction volume is steadily increasing (5 quarters in a row since 2013) and transaction prices are increasing over past years (2010 – 2013). However, sales price multiples reveal that it remains a buyer’s market.  While sellers are getting much higher prices than they did just a few years ago, buyers are getting better value for their business-buying dollar.  This is shown by multiples that remain at historic lows. The average multiple of revenue for sold businesses in Q1 2014 slipped 1.2 percent year-over-year to 0.59 percent and the average multiple of cash flow fell 0.6 percent to 2.21 percent.

Third, 80% of the businesses put up for sale will not close.  Two reasons explain this high number: (1) poor strategic exit planning and (2) over estimating the value of the business. While 96% of Baby Boomers agree that planning an exit strategy is important, 88% do not have one. You would expect well thought-out plans to maximize the monetization of the business would be in place before going to market since on average 70% of the business owners net worth is tied up in illiquidable assets. Unfortunately, this isn’t the case; most owners skip the strategic exit planning and preparation phase because they are too busy managing and growing their businesses. They jump ahead into the sales process ignoring personal financial goals, management or family dynamics, market timing, value enhancements, wealth and tax planning.

Fourth, owners do not know where to turn. Owners’ trusted advisors have limited understanding of strategic exit planning. When owners do turn to these advisors they aren’t prepared or equipped to properly counsel their clients. Consequently, they refer the client to the “known” specialized resource in this space – the investment banker. While the banker provides an important role in an external exit, many aren’t equipped nor compensated to determine an owner’s long-term financial needs, exit channels, implementing value enhancements, strategic tax plans and wealth preservation. They are hired to sell the business externally at the highest price they can achieve.

Lessons learned from these threats are: (1) begin planning early; (2) prepare your company to go to market; (3) select an interdisciplinary team of experts who can work together; (4) monitor the team with a lead consultant; and, (5) execute the plan when the timing is right. Exit planning and execution are a process, not an event.

To learn more how GEM Strategy Management, Inc. can help you exit successfully, please contact us at info@gemstrategymanagement.com.  or 970.390.4441

The content of this post is the intellectual property of GEM Strategy Management, Inc. and cannot be copied, reproduced in any form or used without the express written consent of GEM Strategy Management.