Would you flip a coin to decide when it’s time to sell your business?
February 27, 2020
By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader
Martha leads HK’s succession and exit planning services division and is a regular contributor to Wisconsin’s InBusiness digital magazine.
I had the opportunity to speak recently at a franchise convention about succession planning and, more importantly, building value in anticipation of an eventual transition. In preparation for the conversation, we asked attendees to take a brief questionnaire about where they were at in their own succession-planning process. The questions were a subset of the State of Owner Readiness (SOOR) Survey sponsored by the Wisconsin Chapter of the Exit Planning Institute in 2018.
The results of the 2018 survey of Wisconsin business owners showed that, as a cohort, two-thirds of the privately-held companies were owned by baby boomers, similar to the rest of the country, and that they have invested little time, energy, or resources in planning for the eventual transition out of business ownership. In fact, most had not pulled together a team to help them sort through what a transition might entail, they had done no planning, had no idea what they would do when they were no longer business owners, and had given little thought to contingency planning in the case of death, disability, or other crises.
The group at the convention fared worse than those in the Wisconsin survey and the other SOORs conducted throughout the country. These findings did not surprise the head of franchise services, as she usually is the one to field the call from a distraught spouse when disaster strikes.
What most business owners don’t realize is the fact that they have as likely a chance of controlling when and how they transition from business ownership as they do of winning a coin toss. Death, disability, divorce, disagreement, or distress forces a business owner to leave the business 50 percent of the time. In the case of death and disability, it may not be their own but that of a loved one. Realistically, these crises come when they are least expected and never desired. (Well, perhaps you can see the partner disagreements and divorces on the horizon.)
This fact set the stage to open the conversation around how to protect a business from unexpected crises. It comes down to some key tenets:
- Always be ready. Like your house, take care of the business like it’s always up for sale.
- Understand that your perception of the business as its owner, while important, is irrelevant to a future owner, investor, or financial resource. They may appreciate your perspective, but the bottom line comes down to whether they can replicate and improve on what is there without you.
- The more you can step back and see the business through the eyes of the future owner or investor, and act in such a way that makes the business more attractive to them, the more likely it will be that you will come out of the crisis better than you would have otherwise.
There were many convention attendees who were not baby boomers, yet only those who fit the older demographic attended the succession-planning sessions. (The younger set hadn’t gotten the memo about the coin toss.) To say this is disappointing is a bit of an understatement because the last tenet is:
- Succession or exit planning isn’t something that waits until you’re ready to exit. It’s beginning with the end in mind and driving accordingly. If you wait until you’re tired, bored, fried, or disaster strikes, you’ve squandered your opportunity.
Further, the survey results highlight a world of opportunity for an enterprising younger franchise holder looking to grow his or her business. To the degree the younger owner builds their business so it can be replicated easily, the greater the opportunity that she or he could scoop up the franchise units that the boomer did not create value in. Further, the greater flexibility it provides the younger owner if they decide they want to move on and do something different later. I firmly believe that while boomers are known for the house-flipping craze, millennials and Gen Xers will be leading the company-flipping craze in the future.
Protecting your company is as basic as it comes. What needs to be done to ensure that it is sustainable — “sustainable” meaning that it can continue to function as well as it does without you as with you? Is there a management team? Are customer and supplier relationships with the company and not dependent on a single individual? Are the processes and systems known, documented, and repeatable? Are there good, meaningful, timely, and accurate financial statements? Does your management team use them and other critical data to help manage sales, operations, profitability, and value-building? Do you and the team have a plan and are you working it? These are some of the key attributes that determine if a business is “ready.”
Business owner or no, boomer or younger, you’re in control over your destiny — for now. Should the coin toss fall in favor of the other guy, where will you be? With my friends at the convention, caught flat like a deer in the headlights, or ready to roll with the punches and make the best of what’s thrown your way? You can do this.