The Trusted Advisor January 2014
What are some of the factors that will affect your business transition?Do you have control over any of those factors?
What should you do about those factors over which you do exert some level of control?Despite popular opinion, there are few things we actually have control over in our business lives. In fact, many of the factors that influence the value of a business and success of a transition are out of our control.
This issue of the Transition Advisor will focus on the reality, or illusion, of control most owners can exert on their business value and their business transition. We will explore the following topics and our control over them:
· Macro and Micro economic trends
· The Age Wave - Demographics
· Supply / Demand and available Capital
· Specific Business issues
· Personal IssuesTiming
First let’s visit the timing issue. Talk with any investment advisor worth their salt and they will admit; timing the stock market is at best, very difficult and, at worst, practically impossible. Why do business owners think they can time their business transition given 99.9% of professional money managers are unable to time the stock market with any degree of consistency. The number of deals affected by the 2008 financial crisis is a grim reminder that even those attuned to economic twists and turns are not able to predict the future with any degree of accuracy. At best, business owners can only react to the timing factors affecting their business transition.Out of Control
Macro and Micro Economic TrendsThe national and local economy is definitely out of the control of the business owner. One could even question whether those charged with managing the economy show even the slightest ability to control it. The financial meltdown of 2008 reminded us that bad things can happen quickly and those owners considering an exit in that time frame have put that event off until their businesses have recovered. To a lesser extent, the local economy is beyond the influence of the typical business owner in most cases.
Demographics- The Age WaveThe Business owning Baby Boomers are reaching retirement age at a rapidly increasing rate. This tidal wave of retiring owners, some by choice and some by necessity, will result in hundreds of thousand businesses for sale at the same time. The chart below puts things into perspective:
Chart Source: Exit Planning Institute
The blue line aggregates the yellow and orange lines indicating over 500,000 businesses will be for sale between 2015 and 2020. The Age Wave will have a profound effect on the ability of owners to transition out of their businesses.
Supply / Demand and Available CapitalHundreds of thousands of businesses for sale at the same time will result in an oversupply. A Buyer’s Market will quickly emerge depressing business values and rendering many businesses unsaleable. Add the competition for the limited amount of capital available for business purchases from traditional sources (banks etc.) and the situation becomes even more interesting.
Good news, there are some issues that you do have a considerable amount of control over that have a significant effect on the success of your business transition.
Your BusinessOf course, you do exercise a large degree of control over your business, its day to day operations and future direction. There are some steps you can take in the short term to enhance your transition options:
· Create a contingency plan in case you, or another key person, suddenly cannot participate in the day to day operations of the business. Who is in charge of what, who can sign checks, insurance issues, buy-sell instructions etc.
· Clean up the financials- take non-operating assets, like the sports car or vacation home, off the books. Also, get prepared financial statements from your accountant rather than just going off tax returns.
· Standardize and Memorialize procedures etc. for the business. Repeatable processes, new product development procedures and internal SOPs give positive signals to others.
· Make it less about you- a business that relies too heavily on the owner raises the risk associated with that venture.
· Customer Concentration- opinions vary but, having any one customer comprise more than 25% of your gross revenues throws up red flags to potential buyers.
Personal IssuesDivorce or health related issues can force a transition but, you do exercise some control over those variables. Just as important, you need to assess your desire and energy levels available to continue to run the company. Burnout is a real problem but, a lack of energy could be age or health related. Are you bored? Don’t feel challenged by the business any longer? A yes answer to these types of questions can indicate it’s time for a transition. More on this topic in the next newsletter.
As this edition of our newsletter has tried to make crystal clear; many factors will affect your ability to successfully transition out of your business on to the next challenge life has to offer. Some of these factors are under your control but, many are not. The best we can hope to do is to put those things we do have control over, such as our business and personal issues, in the best condition possible in order to create the perfect storm when those factors we do not control, like the economy and demographics, come into alignment.