The Top 11 Misconceptions About Transitioning a Business
It appears that we have entered the next big surge in business transition activity fueled by the retirement needs of aging baby boomers. The first baby boomers turned 67 years of age in 2012, and we are beginning to enter the years with the greatest numbers of boomers retiring. We estimated that in 2012, based on slow activity in 2008–2011, there were between 1.2–1.5 million boomers (with businesses between $2M and $100M in revenue) who would need to transition to provide liquidity for retirement. However, 70–80% of the businesses put on the market today don’t in fact transition. There are various reasons for this, but common issues include unrealistic owner expectation of value, owner dependency, customer concentration, and belief their business is prepared to transition. This is concerning considering we are currently in a seller’s market. The good news is what made you a successful business owner can make you successful during your exit from the business and in your life post-transaction.
75% of the lucky 20–30% of business owners who actually do transact “profoundly regretted” the decision. A lot of owners view their businesses as an extension of themselves (it’s their identity). They have been working 40, 50, 60 hours a week in their business for 10, 20, 30 years. Once their business is sold, they feel like they lose a piece of their identity and they don’t know how to get it back.
If you are a business owner contemplating a transition somewhere in your future, consider these common misconceptions about transitioning your business.
Misconception #1: Transacting Will Only Take Some of My Time — I Can Handle It.
Getting your business ready to transition, finding prospective buyers, arranging for due diligence by those prospects, conducting negotiations, settling on terms and conditions, and ensuring that the transition meets your wealth management needs — transitioning a business is an extraordinarily time-consuming process. Business owners often seriously underestimate the amount of time and energy it takes to both transition the business and maintain performance during the process.
It is a problem, because deteriorating performance is the primary reason for deals to either fall apart or be heavily discounted. Lower earnings power affects valuation models that financial institutions use to determine how much they will lend to a buyer, and that can reduce the purchase price. When you work with Key Private Bank experts during the transitioning process, you can stay focused on what matters most: the management of your business.
Misconception #2: I Know My Business.
Knowing your business and knowing how to transition your business are two distinct things. Most owners have spent years building the business and are experts at making it successful.
Transitioning a business requires an altogether different mindset, one that calls for thoroughly dispassionate and objective analysis. That can be a challenge when you have put your heart and soul into a business.
Transitioning for optimal value requires a specific set of skills, experience, and expertise. When Key Private Bank works with business owners, we can be objective and look at the business from an outsider’s perspective. We can then make recommendations and suggest approaches that help the owner achieve the best outcome.
Misconception #3: I Know a Buyer in My Industry.
Most owners believe they know which competitor will buy their company, and it is usually a strategic buyer in their industry. In our experience at Key Private Bank, we rarely see this potential buyer turn out to be the one that buys the seller’s business. All too often, they were only interested in buying the company at a discount and lose interest after some preliminary due diligence.
Being in the same industry with potential synergies is only one of many factors in a merger or acquisition. Key Private Bank’s seasoned investment banking team can help you find a strategic or financial buyer — often from outside the industry — with an offer that can be significantly higher than the bid from a prospective buyer you know.
Misconception #4: Either My Management Team or I Can Have Some Early Stage Strategic Conversations Without Working with a Mergers and Acquisitions (M&A) Professional.
Failing to develop a sales strategy before beginning any conversations or not understanding what information can be shared and when can cause irreversible damage to your transition. For example, it puts you at a serious risk of having your management team poached by a competitor, resulting in significant harm to the value of your business.
Providing information to buyers who are on a fishing expedition is a waste of effort and money, and it is time that would be better spent talking with sincere buyers. In addition, sharing information that has not been packaged in the most advantageous way can detract from value and harm your credibility. The negative repercussions that are created can take months to undo. Transitioning a business is a combination of science and art, and it pays to work with experts from the outset.
Misconception #5: My Business Is Ready to Be Sold.
Many business owners underestimate the sophistication of buyers and the rigors of the due diligence process.
A buyer will have their internal team involved in the transaction along with their outside advisors, including their attorney, certified public accountant (CPA), lender, and insurance provider at a minimum. With each team member asking a number of questions and making requests over a short period of time, it is a demanding and stressful process.
Owners should consider starting with a readiness assessment or engaging in a pre-due diligence process.
Understanding where a buyer will focus their attention in examining your business and the information that they will demand is critical to closing a transaction in a timely manner. A seasoned outsider’s perspective and experience will add significant value in this part of the transacting process: Your investment banker keeps your internal team focused on what is important and allows them to keep up with their day-to-day responsibilities. Investment bankers can save precious time. This is a crucial factor, since the longer a transaction takes to close the less likely that it will in fact close.
Misconception #6: The Market Will Be Better Next Year.
Procrastination can be expensive: Many owners in 1999 and 2007 who delayed transacting their businesses admit that they wished they had moved earlier.
Trying to time the market is tough to do — there are just too many variables that are unpredictable or beyond your control.
Owners should focus on what they can control, which begins with developing well-defined goals and objectives for a transaction. Your exit strategy must also be fully integrated with your wealth management strategy and personal plans post-transaction. Even if your desired transaction is down the road a bit, take steps now to build value, de-risk the company, and get an outsider’s perspective from your investment banker. You will then be well prepared for a future transaction and far less dependent on getting the timing just right.
Unfortunately, when an owner feels he or she is forced to transact, it is often due to one of the "Dismal D’s": death, disability, divorce, disagreement, or distress. Unless a plan is in place when transacting at these times, an owner is unlikely to achieve a premium price for the business.
Misconception #7: I Do Not Want to Transact until I Have To.
While the best time to transact a business is when it is healthy and the owner is under no pressure to transact, some owners want to stay in the business as long as possible.
Buyers are seeking healthy companies that have strong growth prospects and a long-term strategy. When we work with business owners who do not want to transact until they have to, we help them develop a road map that acts as a contingency plan — it is there just in case. If an unfavorable situation occurs, the owner is prepared.
Misconception #8: The Investment Banker or M&A Firm Will Build Value.
Odds are they will not — that is not their job. While investment bankers can help you attract a broader market of potential buyers, get a deal closed, and help you get a good price, they do not have the skills or background to build the value of your business.
Although most companies have very good strategies, they often fail in executing them. A value advisor can do a comprehensive analysis of your business and personal situation as well as lead the implementation of the plan to build value if needed. Key Private Bank has a long and successful track record in helping clients with the value-optimization process. We believe that engaging with a value advisor is an investment, not a cost.
Misconception #9: My Lawyer/CPA/Wealth Manager Will Help Me Find a Buyer.
Optimizing the value of the contributions of your professional advisors means that each must be engaged in their area of expertise and focused on what they do well. While your lawyer, accountant, and wealth manager have roles to play, it is the investment banker who has the skills needed to find prospective buyers and get the most out of a transaction.
So even though one of your advisors may surface a candidate, your investment banker is your best resource for identifying a pool of qualified prospects.
Misconception #10: I Met Someone in My Chief Executive Officer (CEO) Peer Group, or My Investors Know a Banking Firm.
Selling your business is one of the most important decisions you will ever make. Take the time to do your due diligence so you can make informed decisions about selecting an investment banker. Learn about possible and perhaps undisclosed conflicts of interest; the team that will be assigned to your deal; and the investment banker’s track record, fees, and experience in working with companies similar to yours. Importantly, you and the investment banker have to have the right chemistry.
A buyer’s dream scenario is when they know the owner is not talking to any other buyers, and finding a buyer is very different from finding the best buyer.
Misconception #11: It Only Takes 6–12 Months to Transact a Business.
In order to realize the maximum value for your business, it may take you one or two years to prepare for the transaction and 12 months to complete the transaction. In addition, you may have to remain with the business for a specified number of years after the transaction. An owner may get an offer well above the company’s market value and the sale closes within three months. This is quite rare, however: At Key Private Bank, we have seen this happen exactly one time.
Rushing a company to market without proper preparation usually costs you, as buyers will discount values for businesses that do not have an adequate strategic growth plan, strong management, or a clean review of due diligence issues. Stopping and restarting a sell side process is time consuming and damages the image of the company. Having to disclose why the business was taken off the market at one time can affect the interest of buyers the second time around.
Taking Control of Transacting Your Business.
The great thing about misconceptions is that they happen in advance of action. An owner’s most precious tool in their arsenal is education. Mergers and acquisition and value optimization have a lot of moving parts. How you start taking the stress out of transacting your business is through nothing more than understanding how successful business owners have maximized the value of their business. We have seen and helped many owners transact their business on top. The concern of how they have ensured they will continue to provide for their family even after they have transacted their business usually is gone. You have run a successful business likely for many years. Developing a strategy to not succumb to misconceptions about transacting is a challenge. Talk with someone who can start providing answers to your burning questions. Transaction planning is not what you think. It is an investment that will pay great dividends for years to come and cement your legacy. In the end it is just good business strategy.
To find out more about how to maximize the sale of your business, contact your Key Family Wealth Advisor.