Oiling the Hinges on Your Exit Strategy

Beyond the emotional value entrepreneurs invest in their outfits, a business is worth whatever the market will pay. Here are some expert tips to maximize the eventual payout

Ned Minor guides business owners through an exit-planning process aimed at reaping top dollar for the sale of their companies. The Denver attorney sees that the U.S. as being on the brink of an enormous transfer of wealth, with half of the country's 9.6 million well-established, middle-market companies reporting that one or more of the owners is 50 or older. Surveys show that 80% of all business owners expect to transfer their companies to a key employee or family member when they retire -- but the reality, says Minor, is that the scenario plays out just 20% of the time.

Knowing how and when to begin the exit-planning strategy is key to smoothing the transition and ensuring a financial reward appropriate to the years of sacrifice most business owners have invested to establish and build their outfits, he says. Minor, the author of Deciding to Sell Your Business, the Key to Wealth and Freedom, spoke recently with Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.

Q: What's the toughest part about selling a business?


I think the hardest thing for most entrepreneurs is making the decision to transfer or sell the business they spent so many years building up and working on. It's an emotional process and most entrepreneurs do focus on selling to an employee or transferring to a family member. But when a business owner finally makes the decision that he really wants to leave the company and move on with life, he usually realizes that the largest asset he owns is his business and he won't achieve financial independence until he sells. Oftentimes, family members and employees aren't going to pay top dollar for the company and don't have the money to buy it outright. And most owners don't want to become bankers for people who want them to carry a promissory note for years.

Q: What kind of money are we talking about, in terms of average sale prices?


I represent privately owned businesses that fall in the middle-market area -- not mom-and-pop shops, but companies with fewer than 100 employees and annual revenue between $5 million and $500 million. They can sell for anywhere between $5 million and $250 million, with most in the $50 million to $100 million range. But even $25 million is a big payday for an entrepreneur. I find that most of my clients expect that what they get for their company is going to finance the lifestyle they want for the rest of their lives.

Q: When do most entrepreneurs start thinking about selling their companies?


When they have gone through what I call the three cycles of business: There's startup, when they're thinking survival and making payroll. That lasts between one and three years. Then there's the growth cycle, when the company is established and the founder is trying to grow it organically or through acquisitions. That can be anywhere from 10 years to 20 years or longer. Eventually, they go into wind-down mode, where they find themselves wanting to do something different, needing a change, and getting tired of running the company day after day. That's when most of them think about succession planning.

The more perceptive business owners, of course, start designing and implementing an exit strategy the day they buy or start the company. I tell people to run their business like it's for sale every day, so that anytime there's interest they can be ready. Keeping the end goal in mind and planning for an eventual exit is the smart way to do it. And what most people really want out of their company is to achieve wealth -- whatever their idea of wealth is. If you want to come out of this experience as a business owner with a big pay day, you're thinking every day about what you're doing and how each decision you make ultimately increases the value of your business.

Q: How do you get your business ready for a sale, even if that day is years down the road?


There are small things you can do all the time. For instance, your books should always be in order and your physical location should always be neat and clean. You should be grooming a management team for the eventual day that there's an acquisition or a sale. You should not be the kind of owner who makes everybody identify you -- personally -- as "the business." No one wants to buy a company that is so overly identified with its owner that it's unimaginable that the company could exist without you.

Q: How does a business owner choose the person she wants to buy the firm someday, assuming it's going to be an insider?


You can sense the people who are most committed to the organization. Most entrepreneurs have much of their identity and their platform in the community tied up in the company. It makes sense that they find someone with a similar loyalty and emotional and even spiritual connection to the company. Your successor should be working nights and weekends to help improve the business. She should have the drive to make it the most successful company possible. She may even come to you with the idea of buying the firm someday.

Q: How do you go about grooming someone to be your replacement?


Share a lot of information with them. I advise business owners to open up about the company's operations, the industry it's in, and the financial aspects of running the business. This means that you have to be comfortable sharing private information with your potential successor. Make sure they know what your goals and objectives are for creating value and keeping the company growing. Then, send them to training programs, industry conventions, and educational opportunities so you can help equip them for the job. You also have to offer financial incentives to these people and help them develop personally so they will measure up to your expectations in the long run.

Q: What if you find that you cannot or do not want to sell to an insider or family member?


You start by putting together an advisory team of professionals. You will need a business broker or an investment banker acting as a third-party intermediary. This person puts together a marketing book and a list of potential buyers, then sifts through the list to find qualified buyers. The best scenario is a controlled auction with several potential buyers. That drives the process through to the best offer, with the most cash and the fewest obstacles to sale.

Even if there is one big player interested in your company, I advise business owners not go to the dance with him alone. Bring in some competition, because you can usually get more money if you wait and you orchestrate. The best scenarios is to create a "fear of loss" in the potential buyer, so they'll think one of their biggest competitors is going to buy your company. That way, they'll sweeten the deal and make it easier for you to sell.

Q: What about the emotional part of the process that you mentioned early?


That's definitely part of it. I tell clients that this is the most emotional business decision they'll ever face. But they can't remain emotional and undecided forever or they'll never get the deal done. You must be 150% sure you are going to sell before you start the process, because if you stick your toe in the water and then pull back, your employees, clients, vendors and everyone else will be all shook up.

Believe it or not, the average age of a successful seller is 45! Once a business owner gets into his 60s or 70s, he'll talk about selling, but many times he won't be able to pull the trigger. And the longer you put it off, the harder it is to do. I get older people who start the sales process and then walk away from deals because they are scared to death that they won't know what to do with themselves if they don't go into the office every morning. To me, that's sad. When I help a younger entrepreneur who can sell for a great price and still have 30 or 40 years of good health and good life in front of them, that's the best-case scenario.

Before it's here, it's on the Bloomberg Terminal.