Takeaway – The best time to sell your company is when you are on top, momentum is strong and you have your retirement in sight. This article discusses an approach where you sell your company now for maximum value and stay on with the new owner until your originally planned retirement date.
The Baby Boomers are retiring in large numbers and according to New Economy Week, over the next ten years, Trillions of Dollars of businesses will be changing hands. The number of businesses that change hands will very closely mirror the number of baby boomers that are retiring.
Price Waterhouse reported in a Trendsetter Barometer Survey of Business Owners that 51% were planning on selling their company to another company compared with 18% anticipating passing on the business to a family member and 14% planning a sale to the company’s management.
The trends point to more than a doubling in the number of businesses that will hit the market looking for a buyer by 2020. Simple economics and supply and demand would suggest that unless the number of buyers increases significantly, there will be an erosion in valuations for business sellers during this rush to the exits. Compare that to the relatively robust environment business sellers have enjoyed over the past 3 years. This period was supported by unprecedented Private Equity investments, in addition to the available cash from corporations with rising profits, and very favorable interest rates.
Given this backdrop, what is a business owner who is anticipating selling his/her business in 2021, to do? Move up your sale timeframe, but not necessarily your exit timeframe. No, I am not talking in riddles. What I mean is that you should take your chips off the table with a sale transaction sooner rather than later. Your eventual exit could be in 2022 after working full time for the new owner for 1 year to transition customer relationships and intellectual property, followed by a limited consulting engagement for two years.
Too many business owners view their business sale and their retirement as a simultaneous event and end up delaying the sale to the day they want to stop working. That
Your best outcome is to sell your business near the top and stay involved as an employee or consultant for a reasonable period. If you look at the transaction structures that are popular in the acquisition of closely held businesses, this approach makes a lot of sense. The more a business depends on the owner for its success, the greater the risk to the buyer. The greater the percentage of a selling company’s projected earnings that is dependent on future new sales, the lower
Most privately held family businesses have one or a combination of these value detractors. Your selling strategy can mitigate the negative impact on selling price. By exiting before the necessity of exiting, your sales trajectory will more than likely be on the increase than on the decline. Buyers pay a premium for growth and discount for flat or falling sales. Unless your entire revenue stream is contractually committed over the next several years, most buyers will introduce an earn-out as a component of the total transaction value. This is a risk avoidance strategy that ties the total acquisition price to the future performance of the business
In spite of the normal response from business sellers who want the entire sale price in cash at close, we believe that under the proper circumstances and properly memorialized in the definitive purchase agreement, earn-outs can be a big win for a seller. We normally try to tie the earn-out to future revenues of the acquired property. That is usually very easy to measure and to audit if necessary. Earn-outs based on future EBITDA or division profitability are more problematic because of the greater possibility for interpretation by the buyer. All of a sudden the acquired company gets an accounting entry for corporate overhead in your financial reconciliation and your profit disappears and
Count on your original champion who negotiated your agreement not being involved by the end of the earn-out period. Make the agreement
If you look at this preferred structure in conjunction with your sell now, exit later strategy, it can work in your favor. Wouldn’t you want to be fully engaged and energized during your earn-out period and drive the value of the earn-out? As part of the new company, you now have 325 installed accounts instead of 25. Your sales force is now 25 strong compared to 2 sales people from your prior company. Your advertising budget is twenty times your old budget. You now have a network of 50 manufacturers reps supporting sales. Your new company’s access to growth capital dwarfs what was available to your little company. Do you think you have an environment where you can achieve
For example, your offer if you back the buyer into
As a business
Dave Kauppi is the editor of The Exit Strategist Newsletter and Author of Selling Your Software Company – An Insider’s Guide to Achieving Strategic Value Dave is a Merger and Acquisition Advisor and President with MidMarket Capital, Inc. MMC is a private investment banking, merger & acquisition firm specializing in providing M&A sell side representation to entrepreneurs and middle market corporate clients in information technology, software, high tech, and a variety of industries. Dave began his Merger and Acquisition practice after a twenty-year career within the information technology industry. His varied background includes positions in hardware sales, IT Services (IBM’s Service Bureau Corp. and Comdisco Disaster Recovery), Software Sales, computer leasing, datacom, and