Buying a business with the end in mind
During my discussions with clients interested in buying a business, the question I am often asked is “When should I start planning for the exit of my business?”
If you understand these seven simple truths in this section, then it is logical the preparation of an exit and succession plan should commence right now when buying a business!
Even ensuring you have the basics covered in a plan is almost guaranteed to benefit you and the business.
There is a 100% certainty that you will need to exit your business!
- All business owners will need to (one day) exit the business.
- All business entities have some value (even if it is net assets) that can be sold or transferred to someone else.
- Preparing in advance for this event will significantly increase the value that could be transferred.
- Preparing in advance for this event will significantly increase the probability of a successful outcome.
- A business built for exit (and maximum value) will be a better run business that will allow you to make more profit and reduce your stress.
- Planning for exit means personally planning your finances and your ‘life after’ plan, which will result in improved personal wealth and happiness.
- The value of a business can, in some cases, be over 50% of the business owner’s personal wealth. Therefore, we have a responsibility as a business owner to think carefully about this transition, for the sake of ourselves, the family, and other stakeholders.
Planning starts with knowledge – understand your ‘why’ buying a business
The best way to exit the business is to start planning years before. As a business owner, you need to begin a learning journey. The more educated you are the better your plan and the better the outcomes.
You must understand the ‘why’ of your exit plan when buying a business.
The exit and succession plan for each business owner will be different for a myriad of reasons. For example, individual personal wealth and health circumstances, your outlook on life, family circumstances and the type of business you buy.
Below are some typical transition pathways that include forced and non-forced exit events: Non-forced events are good.
- An offer ‘too good to refuse’ is made to buy the business.
- The business owner wants to transition into retirement.
- The business owner wants to transfer ownership to family members.
- The business owner has been offered a job or opportunity elsewhere and wants to move onto a new era of his/ her life.
- The business owner uses the sale as a means of risk mitigation, i.e. cashing in whilst the going is good before markets change, new competitors enter the marketplace or circumstances change.
What not to do
You have done a great job in buying a business, establishing and building your business and now it is time to reap the rewards!
It is unfortunate, however, that many business owners who spend years building their business will receive only a fraction of what their business is actually worth.
Most business owners do not think about exiting their business until it is time to sell or it is too late. They quickly put together an advertisement or find a business broker to sell their business and implement the transaction process before thinking through what is required for a successful sale.
Before you start to advertise the business, you need to put together the correct material and systems to present your business in the best light. Why? Because the better your business appears on a piece of paper, the more it will be worth and the better the chance of actually selling the business at the desired price.
However, making your business appear attractive may take years of planning and executing good strategies. Understanding these strategies is very important before you decide on buying a business.
This is an example of what can go wrong
Mary owns a manufacturing business and advertises it as a great business with a turnover of $2,000,000 annually with reasonable profitability and heaps of potential. This looks good on paper and a potential buyer gives her a call.
The buyer sounds very interested. He comes to Mary’s premises and asks for some sales and management reports. These sales reports don’t seem to add up to $2,000,000. Mary explains it is very complex and there is a difference between the management and accounting reports.
The potential buyer asks for sales by product. Once again, Mary’s reports do not add up. Mary tries to explain the differences but each time she pulls up a different report she gets different variances.
The buyer then asks for the last three years’ tax returns. It takes Mary a week to track these down as her accountant is away. Mary also can’t give him last year’s return as it has not been done even though the financial year finished seven months ago. The tax return shows a loss. Mary explains this was done on purpose and she is taking lots of extra payments out of the business but has no documentation. All the official numbers in the tax return vary to numbers placed in the advertisement and those mentioned in their conversations.
Finally, the potential buyer asks to see the marketing systems and the policies and procedures – none of which exist and no employee seems competent enough to run the business in Mary’s absence.
At this stage, Mary has lost the buyer’s trust and all credibility. Her constant delays result in the hot buyer making the decision to go with an alternative business for sale.
And what’s the outcome? Mary probably will not sell the business and, if she does, it will be for a discounted price.
Have an exit plan for a business before you get started buying a business!
Next time we will look at types of exits.
Author: Kathleen Dale, Business Advisor and Founder of Compass Business Advisory.
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