I’m working with two business owners who are at different points on their exit journey. Owner #1 just completed her business exit readiness review and wants to sell her business in about three years. She is in the “fix up” phase. Owner #2 is selling a portion of her business to her ultimate successor and wants to complete this phase of the journey by the end of the year (the “sell” phase).
There are similarities and differences in these situations and there are some lessons you can learn from each.
Lessons from Business #1
Owner #1 knows she’s not ready to exit her business right now. She has three challenges. First, her revenue and net income grew slowly in the last few years and then went down last year. There are good reasons for the slow-down in revenue, but a buyer won’t care. Buyers want to see growth up and to the right over at least three years.
Second, this business owner has excellent books and records for most aspects of her business, but her accounting is muddy. She has three lines of business, but they’re aggregated in her accounting records and they’re quite different businesses with different dynamics. A buyer wants to see clean and clear accounting information.
Third, this business owner IS the business. Without her, the business would run ineffectively. I discussed the vacation rule with the owner. That is, can the business owner be gone on vacation for three weeks, not call in every day, and have the business run efficiently and effectively? In the case of this business owner, the answer is no.
The three lessons from business owner #1:
- Grow revenue and net income consistently for at least three years.
- Make sure accounting records are clean, clear, and concise.
- Ensure the business can stand up to the vacation rule.
How about your business? How does it measure up to these three guidelines?
Lessons from Business #2
The second business owner wants to sell by the end of the year a portion of her business to an outside person she knows, likes, and trusts. I’ve spoken with the potential buyer, and she does seem to be sharp, motivated, and aligned with my client. The business owner also thinks the new person may be her longer-term successor. It seems like a win-win for both business owner and buyer.
However, there are three challenges they face. The first challenge is the business owner doesn’t have good accounting records for the portion of the business she wants to sell. As a result, the buyer is nervous about the sale price.
Second, the business owner knows she will share future decisions about the business, something that makes her un-easy. She’s built the business her way and it’s been successful. The new partial owner wants to have a say in how the business is run in the future and the current owner sees potential for conflict.
Third, the potential buyer is in a hurry to get a deal done before the end of the year for personal reasons. The business owner understands this and wants to be supportive of the potential buyer, but knows decisions made in haste are regretted at length.
The lessons from this situation:
- Again, good accounting records are essential when selling even a portion of a business.
- Emotional issues (loss of autonomy for the owner) are as important as financial ones.
- Exiting a business efficiently and effectively takes time.
As in reviewing business #1, how would you and your business compare to the situation for business owner #2? Are your accounting records current and clean? Are you emotionally ready to give up your business? Do you have enough time to carefully plan a business exitv?
Summary
Exiting a business or selling a portion of it has challenges. However, with foresight, planning and enough time, you can exit your business effectively, efficiently, and profitably. Even if you don’t want to be done with your business for several years, start planning now to make the exit easier and smoother for your buyer, your employees, and contractors, and yourself.
Let’s Have a Conversation:
Please take three minutes to review your business considering the five lessons I’ve outlined here. Are you ready? What questions do you have that I can answer in a future blog post? Or make comments below. Thank you.
