A CNBC succession planning survey reports 78 percent of small business owners plan to sell their business to fund their retirement, and they’ll need 60 to 100 percent of those proceeds to cover their needs.
Yet according to M&A Market Pulse data just released by Pepperdine University, IBBA, and M&A Source, of the small and medium size businesses that sold last year, only 43 percent engaged in proactive planning. That’s a big disconnect.
Imagine you have worked in corporate America but waited until retirement to open a 401K and talk to a financial advisor. Everyone would say you’re crazy, but business owners play that kind of Russian roulette every day.
Over the years, we’ve had some sellers plan ahead, but the majority are ready to sell now. Recently, however, I talked with what might be the most prepared family business ever.
Started in the 1970s, this business successfully transitioned to the second generation. One son holds majority ownership, but the family still has in-depth board meetings to discuss performance and strategic growth. From what I hear, these are long, serious meetings in which everyone rolls up their sleeves to make the company stronger.
Several years ago, they started to get regular valuations. This gave them the accurate financial picture they needed so family members could buy/sell stock and key employees could be offered an ownership stake. That alone puts them further ahead than most businesses we encounter.
But now they’re asking us to create a contingency plan in case:
a) something unforeseen happened to the CEO or
b) the business was approached by an unsolicited buyer.
They want a plan in place, ready to execute at the push of a button, should the need arise.
We’ll put together a marketing book so potential buyers can see the true value of the business. And our analysts will research the industry’s strategic buyers and update that annually. We’ll present to their board, and at the right time, we may present to employees as well.
This isn’t a large company ($5-10M revenue). So why the investment?
Every stakeholder will have greater confidence in the business’s ability to weather a tragedy. That means less confusion and higher employee and customer retention, should the worst occur.
By looking at it from the buyer’s perspective, leaders can focus on initiatives that would create the best value in a sale. That’s likely to drive growth, even if they never sell.
This business will have a rapid response to unsolicited offers. They’ll have better leverage in negotiations and (ideally) can create an open auction environment by bringing other buyers to the table in an accelerated timeframe.
Whether they want to sell or need to execute a crisis plan, they’ll be ready. In the meantime, they’ll have unique insight to continually enhance their performance and value. It’s a proactive exit strategy, built at the best time: before they’re ready to leave.