Many entrepreneurs work for years building a viable and profitable family business, without ever giving much thought to its long-term future after exiting. Most may envision family taking the reigns and continuing the work already built on a strong foundation. Statistics prove this strategy often results in the business’ slow and often painful demise, shrinking profits and overall entity value. This decline may occur rather quickly or unfold over years, even generations. Allowed to progress to the point where the company’s sale seems the only real option, an unfortunate reality sets in: the business is now worth significantly less.
I spoke in a previous article, “Why Your Business Is Worth WAY Less When You Have No Plans To Sell” of the four reasons that cause business owners to sell their companies when no intention to sell had existed before. I discussed in detail the pursuing scenarios and outcomes for each: liquidation needs, health issues, burn out, and business transition. Rather than waiting until external factors stimulate an untimely sale, however, business owners are wise to create more wealth for themselves and their heirs, by timing a sale to maximize buyer pricing.
Family businesses are advised to strategically plan to sell their business when it’s worth the most and heir their family the liquidated wealth, in Thomas Deans’ book Every Family’s Business . I couldn’t agree more. Why? I’m fourth generation entrepreneur (at least that’s as far back as I’ve taken my genealogy). My husband is third generation. Entrepreneurship is not only in our blood but we’ve also witnessed and re-heard generations of stories involving the heartache of these scenarios and outcomes first hand. Families divided and wealth dwindled but unnecessarily if the next level of wealth building strategy had been entertained: Preparing Your Company for Maximum Sale Price.
When is the time right? It has everything to do with overall growth strategy and market conditions. Growth strategy comes from within and is achieved according to company performance. When timed with the following three market conditions you have a company “Ripe” for what we call a “home-run” sale.
1. Availability of Capital – This is more complicated than it may seem. Right now, for example, due to the turbulent economy most sellers assume buyers don’t have the money and lenders aren’t lending. The reality is that a lot of money is out there, looking for strong investments. The baby-boomer generation has capital and wants it invested. Stock market investors have pulled their money out and are looking for something more stable and predictable. A strong business, “ripe” for acquisition finds buyers, both eager and interested, with money to invest.
Our lending market is in an unprecedented state and the days of easy loans are long behind us. Banks, however, still need to lend and they’re looking for strong businesses to support. Buyers are more likely now to be required to contribute more capital upfront. When we represent sellers in today’s market we make sure only the most qualified and interested buyers are in the consideration. We work to maximize interest among them and to ascertain that they’re committed to making the necessary investment levels. The stability of the stock market is another factor that actually seems to run contradictive to the availability of acquisition capital. When volatile investors tend to pullout their capital, they look elsewhere for more stable and predictable gains. Bullish, private investments encounter more competition because investors have gained more capital, now available to reinvest, and thus they tend to be less risk adverse. Both scenarios benefit the privately held business interest when considering the liquidation of its assets.
2. Market Interest/Demand – Every industry experiences cyclical trends in buyer demand. Recent history of such demand, and, perhaps even more importantly, projected growth trends in an industry are critical to value. Additionally, political initiatives can impact potential opportunities, revenues and even post-tax profits. A function of simple supply-and-demand, when an industry shows promise buyers will pay more. When buyers are willing to pay more, more buyers are interested. With more prospective buyers, purchase price increases. When positioning a business for top sale price it’s well worth tracking trends and forecasts to know when the horizon looks promising. It’s also highly beneficial to present the supporting details to buyers educating them on upward trends and industry excitement.
3. Current Capital Gains Tax Rates – The timing right now will probably never be better for the consideration of sale under the current capital gains tax rate. Capital gains tax rates are currently just 15%. However, due to the current political environment, this rate is likely to increase. Predictions for next stage capital gains hikes have ranged from 20% to 35% for the future. This could mean additional tax of 5% to 20% for the exiting shareholder. Capital gains tax could thus grow to anywhere from 1/3 more, to potentially over double the current rate. Clearly, this is no small potatoes, and definitely is a consideration that should not be overlooked.
In addition to these factors there are many internal practices and tactics that pay off handsomely when implemented months, or even years, before a business begins to court prospective buyers. These include strategies like the development of an independent and competent second-tier management team, careful cultivation of consistent growth and stability of revenues and profits, and the creation of a well planned go-to-market acquisition strategy and timeline. We work regularly with our client-sellers, through value-assessment consultations and small-group mastermind programs, to help prepare companies for a highly strategic and well-postured approach to cashing-in what is often their biggest asset – and positioning to achieve a maximized sale price.
When business ownership is a shrewd investment strategy and its liquidation is timed for its peak-value, family wealth, and long-term stability, is not only preserved but also maximized. I believe an exit strategy should be a required final chapter to every business plan focusing on the maximization of ownership wealth. Critical to this exit is a structured and strategic approach, which can literally mean the difference between millions of dollars in final sale price and the family’s resulting net wealth.