By Chuck Richards
Over 90 percent of business sales fail.
It’s a stunning figure and a warning to all baby boomers and seniors, who own businesses and are planning to sell them before retiring, that the process can be hazardous and the end result can be heartbreaking.
The US faces a potential $6-trillion economic crisis as over 70-million soon-to-retire baby boomers, many of them small business owners, sell or try to sell, their private businesses in the next decade. If baby boomers cannot effectively sell or transfer the 4.5-million private businesses they own to the next generation, it could have a huge impact on our economy.
Retiring boomers and seniors need to be confident that a sale will not only succeed, but their companies will survive and thrive. A successful sale insures that long time loyal employees will keep their jobs and the cities and town where they live will continue to keep its residents employed.
Unlike selling a home, a vehicle, or another tangible asset, selling a business can be exceedingly complex. There are several factors to consider beyond assets and financial performance, as well as the process of the business transfer itself.
Get help
It is important to enlist an advisor who has experience with mergers and acquisitions, who knows the accounting side of the transaction, and who knows where the opportunities lie to structure the deal favorably. It is also important to make sure the deal is structured in a way that aligns with your personal financial goals and retirement lifestyle.
Talk with some of your peers who have already gone through this process. Gain insight from their experience to learn what they would (and wouldn’t) do if they were to sell their business today.
Financials are only half of the value equation
Financials only tell half of your story, and savvy buyers know this. Your operational performance will be what determines if the transfer will be successful under new ownership. Understanding your operational performance will allow you to communicate this effectively to your potential buyers.
If your operational performance is strong, the value of your business to a buyer is much higher. Good buyers understand that strong operations equate to a cost savings during the transfer process, as they do not need to spend time and effort on making improvements.
If your operational performance is weak, consider working with your advisor to make improvements. Often, large performance gains can be identified by documenting your existing processes.
Pre-due diligence is a necessity for a smooth sale
Buyers will perform a comprehensive evaluation of your business to determine the potential for commercial success. Avoid surprises in this due diligence process by performing a pre-due diligence assessment beforehand.
This investigation will allow you to view your business through an objective lens, and gives you a chance to fix any red flags you may find and close the value gap (the difference between what the markets will pay for an asset and its current value). Address these issues before your buyer performs their own due diligence to be confident that their assessment goes smoothly.
A narrow value gap and lack of red flags during the buyer’s due diligence process will also make them more confident in their purchase. It also eliminates the discussion of assurances or a reduction in value to mitigate these issues during negotiations.
While the odds of a successful business sale are long, you can succeed with your sale if you heed the above advice and prepare in advance.
Chuck Richards is the CEO of CoreValue Software ( www.corevaluesoftware.com ) in Norwich VT.
CoreValue’s software helps business owners and CEO evaluate the financial and operational health of a company in advance of its sale.
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