Somewhere between 8 and 10 million small U.S. businesses owned by baby-boomers will come to market over the next ten to fifteen years. That doesn’t sound like a seller’s market to me. That is why it is also predicted that only 20% of these sellers are expected to have a successful experience.
If you plan to exit your company in the next decade or so, and everyone does at one time or another, how will you ensure you are one of the 20% to exit successfully? How will your business stand out among the many others that will crowd the streets of the small business marketplace?
You are about to go through a unique period of time. The baby boomer generation owns about 10 million businesses and most of them will be on the block in the next 10 to 15 years. This is an unprecedented number of companies that will become available to compete with the sale of your company.
If you are like most business owners, a large portion of your wealth is tied up in the value of your business. The most anticipated and probably the largest check you will ever receive will be from the sale of your company.
The combination of a huge supply of businesses for sale and a shrinking demand (the number of buyers is correspondingly going to decrease as baby boomers are no longer buying), will most certainly make it more difficult to get the value you may desire.
In a buyer’s market, only the companies that look the best will be attractive. Red flags will quickly send them on to another company since there will be other choices available. Here are some red flags that a prospective buyer will notice. They will likely keep your business from selling, or diminish the eventual selling price:
- You have individual customers that that make up a large portion of total sales. Having greater than 10% of your revenue coming from one customer adds to the risk assumed by the buyer, thereby reducing the amount they will buyer will pay for your business.
- Poor or non-existent sales growth. A buyer wants a company that has upside potential, not one that has peaked.
- No new products or services on the horizon. Most products have a life cycle. If the business is not positioned to take on new products, then the prospective business buyer will heavily discount future cash flows from the older products, and thereby reduce the price he is willing to pay you.
- Management staff that will need to be replaced by the buyer. Do you have the right people in management positions? If you have under-qualified or under-performing individuals in these positions, they will cost you money when it comes time to sell the business.
- The selling price of your business will be discounted if you as the business owner haven’t been able to take time off. The business is not worth much, as logic has it, since you run the whole show and won’t be around after the sale.
- Deferred maintenance on the building and/or equipment. Every business, like real estate, must have curb appeal.
- Poor accounting systems. When buying/selling, it really is all about the numbers. If you can’t prove out the numbers, the prospective buyer will likely move on to another acquisition prospect.
- An unreasonable selling price expectation. Historically, most companies sell for 4 to 6 times the adjusted cash flow of the business, less debt or EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). This can at times be more or less depending on the circumstances.
Fortunately, most of these shortcomings can be fixed, but you have to have a plan. A good long-term exit plan will address the challenges above. Your plan should include a Success Team and an organized Exit Strategy Process.
The Exit Strategy Process can be exhausting, and many times distracts the business owner from keeping the company on track during the Exit Strategy period. Many times this distraction causes the performance of the company to suffer and if the sale is delayed or the deal does not come to a closing, the value of the company can suffer immensely.
Our new book “The Exit Strategy Handbook” by the B2B CFO Partners, LLC is coming out this month along with our Exit Strategy Dashboard Software that tracks your progress so you can be one of the 20% to successfully exit your business. This new program offered exclusively by our firm makes me proud to serve the Western New York Region as a Partner in B2B CFO®.