FOR EXECUTIVES SEEKING TO BUY, SELL, OR RECAPITALIZE BUSINESSES
How to get the most out of a business transition
“You were born to win, but to be a winner, you must plan to win, prepare to win, and expect to win.” – Zig Zigler
Most of the business owners we talk with have a fundamental misconception about the business sale or the business transition – they see exiting their businesses as an event instead of a process. From our experience, viewing the business transition as an event instead of a process can lead business owners to make decisions that lead to unwanted outcomes. Without a proper mindset, business owners who go through the transition process typically do not end up optimizing either their business or their personal outcomes.
For many mid market privately held business owners, a majority of their wealth is tied up in their business. Consequently, lack of proper perspective and planning for the business transition can lead to significant financial distress for the business owner.
A mid-market business owner typically plays two roles: The first role is that of an executive who runs a well oiled machine with obligations to employees, suppliers, customers and the community. The other role is that of a shareholder who is trying to maximize the return on investment for the benefit of self or family or an estate. Depending on individual perspective and situation, the transition being sought could be to get out of one or both of these roles.
We view business transition as a multi step process that should be started several years in advance of the planned exit date. The first step in business transition planning is establishing the motives for seeking the transition and identifying the desired outcomes of the process. Depending on the individual situation this could be a very simple or complex matter.
The next step in the process is to establish a proper transition channel that can produce the desired outcomes. The transition channel could be internal or external. An internal channel could be a business transition to heirs, employees, co-owners, etc. An external channel could be an acquisition by another company, PEG, individual buyer, or going public, etc.
Once the proper transition channel is established, the next step is to check the feasibility of making the transaction work with the desired target within the chosen channel and the methods that can be applied to make the transition occur. The methods used should be picked after careful tax and estate considerations. In cases where the owner is relying on the cash flow from the business to retire, special consideration needs to be given to ensure the seller gets a cash flow that is commiserate with his or her expectations. Care also should be taken to protect the cash flow and ensure a comfortable retirement. For internal transitions, ensuring the company has a good capital position and access to needed capital helps to make sure the transfer is successful.
Once the motivations, goals and outcomes are well established and refined, the business owner needs to establish a timeline for the process. A properly planned transition will allow the business owner to position the company in a desirable light during the exit process. Positioning the company makes the value of the company visible to the acquirers. Attention needs to be paid to topics such as:
- Has the business been built for a transition?
- How will the transition occur?
- Is there a logical evolution path for the business? What is the potential?
- What level of investment is necessary to sustain the business or grow it to the next level?
- Who would be the ideal person or what would be the ideal entity to be the next owner?
- Is there a legacy that the owner wants to leave behind?
- Is the business environment expected to face a head wind or tail wind in the coming years?
These questions and others need to be answered in the context of the mindset of the likely acquirer. For example, a typical acquirer for a mid market company is likely to be a PEG, a consolidator or a large company. The business owner needs to be keenly aware that these acquirers have considerable experience making acquisitions and among other things they are going to be looking carefully at how the company performed in the past and how it will perform during the exit process.
A business is ready for the market only after the business is prepared for the anticipated inquisition. The subsequent steps including the transaction itself and satisfaction of the post transaction obligations are complex matters that require a tremendous amount of creativity, negotiation skills, understanding of the tax laws, attention to details, and other deal making skills.
In summary, business transition can be a complex process and needs to be tended to with care. Lack of understanding of the process means that the business could wither away without a transition ever occurring or the business owner could get much less out of the business than what is possible. The business owner needs a disciplined process that can achieve the necessary outcomes. Having a proper mindset about business exits is imperative to protect one’s nest egg and the family estate.
A competent mergers and acquisition advisor who can walk the business owner through these steps can help the business owner to establish and achieve the desired outcomes.
For assistance with selling or recapitalizing your mid market company, contact:
Chakradher (Chak) Reddy
Elite Mergers & Acquisitions Inc
2260 E. Bidwell St #1114, Folsom, CA 95630
Ph: 800-335-3068; Fax: 888-502-3817
Disclaimer: This document is for informational purpose only and should not be construed as tax or legal advice. Please contact your CPA/attorney for advice on your specific situation.