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Create Favorable Conditions to Reduce Risk in Exit Timing

March 11, 2015

reduce risk with favorable conditions

Make Your Business Valuable

Treating your business as an investment is critical during the reign of your empire. Like the stock market, there are many factors that impact your return on investment in business. Savvy professional investors would say, “You can’t time when to buy or sell your stock.” But business owners can create favorable conditions to enhance the timing of their exit.

In Sell Your Business for an Outrageous Price: An Insider’s Guide to Getting More Than You Ever Thought Possible by C. Short2, the author identifies several risks to be aware of in the years prior to selling your business.

  • Economic Risks Timing: 1) economic uncertainty, 2) buyers hard to find, 3) exorbitant up-front fees from investment bankers, auditors, etc., and 4) seller expects an unrealistic selling price.
  • Personal Risks Timing: 1) family dynamic in business, 2) owners have mentally checked out and don’t mind the store, and 3) disillusion of DIY in M&A transaction.
  • Business Risks Timing: 1) unsustainable significant structural change in organization, 2) loss of employees, customers, suppliers, etc.

Did you ever consider this reality: You are financing a portion of your retirement when you exit your business, regardless to whom you sell.

In the journal article “Succession Financing in Family Firms” published by Small Business Economics1, an empirical study shows that both internal and external transfer involves some debt or equity financing, especially in family-owned businesses (FOB). The study indicates that models of multiple owners (including husband and wife teams), multi-generational businesses, or a family member as CEO or a non-family member CEO, all have a propensity for financing debt. The authors also point to a four-year study which revealed that of all the FOBs transferred, 57% were transferred internally and 43% externally, using debt financing.

reduce risk in exit timing

They also suggest that owners need to shift their mindset from owner-operator to owner-investor.

Creating  favorable conditions to reduce risk in exit timing.

I agree with savvy professional investors who say you can’t really time buying or selling your stocks. But I do believe you can certainly reduce the risk and enhance your odds of winning when you transition out of your business using the Triple Bottom Line Succession (3BLS) and Triple Timing (3T) models.

The 3BLS best fits into the 3T. Let’s review the chart below:

reduce risks in exit timing chart

On the left-hand side of chart S-1, you see the 3BLS that includes these stakeholders: 1) employees, 2) customers, and 3) investors.

On the right-hand side, you see the (3T): 1) economic, 2) business, and 3) owners. Succession is no longer a secrete affair of the owners; you can see that all stakeholders are identified here, including the family.

The following is an actual client example (names have been changed): John started succession planning 10 years prior to his desired retirement age of 65. He and his business partner Mary identified potential internal candidates—based on the internal transfer method of management buy-out. Both John and Mary (not husband and wife team or family) bought their current business from a previous partner about 15 years earlier. They are in the professional services industry.

They know there is potential for 3rd parties to buy them out. My team first helped John and Mary identify a viable business model (Customer Succession) to ensure their competitive advantage continued to stay ahead of industry innovation and benchmarks.

Second, we assigned two candidates, Ben and Judy, as part of the Key Management Team (KMT or Employee Succession Team) and started the grooming process. Since we didn’t know if John and Mary would be willing to sell to a 3rd party, it made no sense to talk about a transfer with Ben and Judy at that time, so long as the business could run with or without John and Mary. We did not want to set the wrong expectations.

Third, we started working on the profitability benchmark and intellectual property build-up to further increase the business equity value positioning for future investor succession.

John and Mary, with our help, effectively reduced all 3T risks to a minimum, over time.

So what can best enhance the value of a business?  Timing. Timing. Timing.

  • Economic Timing: The overall economic cycle impacts the buying and selling sentiment. The multiples average comes from M&A market activities.
  • Personal Timing: How ready is the owner emotionally, and is the right retirement integration and transition plan in place?
  • Business Timing: Does your business possess the competitive edge to be attractive in your industry?

Just as John and Mary proactively looked at their business as an investment and implemented timely implement succession strategies, so can you!

References:

1Koropp, C., Grichnik, D., & Gygax, A. (2013). “Succession Financing in Family Firms.” Small Business Economics: An Entrepreneurship Journal. 41(2), 315-334. doi:10.1007/s11187-012-9442-z

2Short, K. (2015). Sell Your Business for an Outrageous Price: An Insider’s Guide to Getting More Than You Ever Thought Possible. New York, New York: AMACOM.

3Slee, R. (2011). Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests (2nd ed.). Hoboken, N.J.: Wiley.

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About The Author

Chia-Li Chien, CFP®, PMP; Exit Strategist for Women Business Owners at Value Growth Institute in Charlotte, NC. She is the award-winning author of the books: Show Me The Money and Work toward Reward and a faculty member of the American Management Association. Her blog and newsletter was named a Top Small Business Resource by the New York Times You’re the Boss blog. She can be reached at jolly@chialichien.com or 704-268-9378.

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