What makes a business successful? In many small businesses, the owner is the principal driver to that business, particularly from a technical and sales aspect. They have been the one running around, coordinating sales, staying late to ensure that products get made, and working the relationships with clients to ensure that the orders continue to come in.
With all that, this individual is doing, have they ever thought about what they want to do next? Unfortunately, there is a good chance that one of the 5 D’s (Death, Divorce, Disability, Distress, and Disagreement) could affect your business. Let us hope that this does not happen, but we all know happens when we hope in one hand and do something else in the other!
Consider this, a $10MM S-Corporation manufacturer, with a single owner. The owner’s best friend is diagnosed with cancer. Now the owner realizes that they want to sell their company because they want to spend more time with their kids or grandkids. Will this business be able to maximize value upon exit?
Most owners have the majority of their wealth tied into the business and one of the ways to get that wealth is to sell the company. A successful transition plan has three areas of focus, 1) understanding and maximizing the value of the company, 2) understanding the owner’s future financial needs, and 3) understanding what the owner wants to do after exit.
The owner has an idea about one of those areas, but it is very vague. Working with owners to understand what they want to do upon exit helps with another area, the owner’s future financial needs. It is important to create a plan to understand how you want to spend your time with your grandkids. For example, do you want to be able to pay for their future college needs, take them on nice vacations every year, or spend time skiing with them?
Further understanding what the owner wants to do next will help the financial planner develop a plan to determine how much money that owner needs to achieve their desired lifestyle.
Once the future needs are determined, the owner can look at current business value. The value is something that the company should have a rough idea about, and maybe it’s a function of EBITDA multiplied by a market multiple factor. While this looks relatively simple, there are ways to improve the overall value of the company, and some of those factors may not be solely financially driven.
Developing a plan that addresses the owner’s exit ahead of time isn’t just good succession planning, it is good strategic business planning. By creating this plan, the owner of the company is better able to understand the context of what the company is worth, and has found ways to maximize this value, taking into account their financial needs for the future, and finally creating a plan for how they are going to spend their time, leading to a successful exit from the company. As a result, the owner can enjoy their time instead of wondering, “Did I do something wrong? Could I have gotten more out of the sale? What am I going to do now”?
