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 Issues
Timing
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 Trends
The 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 Wave
The 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 Capital
Hundreds 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. In Control
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 Business
Of 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 Issues
Divorce 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. Recommendations
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.
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