|
||
|
|
VALUE ISSUES IN TIMING THE SALE OF YOUR BUSINESS
Business owners make many sacrifices for their business.
Theoretically these sacrifices are investments in the future that add
“value” to the business which will be reaped at some future date.
But when is that future date, and what impact will that date have on
the value to be reaped?
“Value” is defined as “worth
in usefulness or importance to the possessor; utility or merit.”
Note that value may include but is not limited to money, i.e. it may
also include such things as peace of mind, freedom, security, enjoyment,
fulfillment, etc., etc. Maximizing the value in the sale of your business would
properly include the maximizing of these less quantifiable rewards.
Ask Dale and Peter Bassett.
The Bassetts operated “Bassett Meats, Inc.” in Sanborn, Minnesota
for many years. Dale Bassett, at
55 years old might say that his business was consuming his life.
Maximizing value for Dale meant providing an opportunity for
fulfillment from other pursuits and allowing more time for the enjoyment of
working in his shop, hunting and fishing.
Dale’s decision to sell recently factored in the value, to his life,
from accomplishing goals not measurable in dollars.
Following the successful sale of the business, Dale’s life took a
turn for the better – hunting, fishing and workshop time is now available,
and the fulfillment of achievement is being provided through his new
consulting activities on behalf of Land ‘O Lakes in international trade with
Russia. Certainly the success of
this transaction was contingent upon receiving adequate money values in the
sale, however, the point is that Dale may have been able to achieve more money
by timing his sale at a later date, however, he may not have been able to land
the consulting contract at a more advanced age and would have had fewer
remaining years to enjoy in his shop or hunting or fishing.
Okay, so they say that while money
isn’t everything it makes more of a contribution to happiness than does
poverty. So what about the timing
of a business sale to help maximize the money to be received?
There are a variety of factors that influence that actual price to be
received for your business which are a function of timing.
Probably the most critical factor revolves around the financial
performance of the company. Also,
the performance in the merger and acquisition market impacts supply and demand
and therefore prices for businesses. By
timing a sale so that good company performance aligns with a strong
acquisition market, a business owner can have a significant impact on the
value to be derived by a sale. The
current state of low interest rates, escalating stock prices, and low stable
inflation rates is producing one of the most active merger markets in years.
Furthermore, the market is always more receptive to companies having
prosperous times than those that are past their peak. If an owner can sell before the business starts to decline,
or better yet, while it is clearly in a growth mode, the seller gains
tremendous negotiating leverage.
At Bassetts, business was
profitable but fairly stable and seemed to be missing some component of the
growth formula. The family plan
had been for Dale to possibly retire someday and son Peter to continue running
the business. As is often the
case, the “American Dream” vision of a business passing through the family
ranks would not have accomplished any of the intended goals. Peter Bassett would have been faced with the burden of
growing the business sufficiently to provide the retirement values Dale would
need, without the additional resources necessary to produce that growth.
While Peter loved the business and intended to continue servicing
customers with specialty meat products, his obstacles would have been nearly
insurmountable and certainly the “value” which he would have been deriving
as a business owner questionable. Now he could make more money than if he had taken over the
business and he is not personally at risk.
No, the only way to produce sufficient money values to allow Dale and Peter to achieve other values, was to arrange for a sale to a new owner which would have the missing ingredients required for additional growth. Fortuitously, there was such a buyer and a transaction was negotiated with Wimmers. Wimmers needed Twin City distribution channels for other products similar to the specialty meat products produced by Bassetts. Furthermore, they need a high talent such as Peter to grow their organization’s sales. Although Wimmers turned out to be a perfectly synergistic acquirer, it should be noted that if Wimmers had already initiated Twin City distribution channels or, if they were not et ready to market their products to the Twin Cities, the fit would not have been as good and the transaction would quite likely not have occurred. In other words, timing had to do with market forces specific to the best buyer. Although these timing issues cannot be controlled, they can be identified through a regular assessment of the marketplace. Although it is unrealistic to hope that the stars will always line up perfectly for the timing of a sale, a business owner should strive to benefit from as many positive timing attributes as possible.
These would include at least the following:
(1) Sell when the business is doing well. After all, all the buying books say to buy a business that is
doing well and is growing. There
is often a temptation to operate a business that is doing well, especially if
there have been recent periods of poor performance which the business owner
has suffered through in anticipation of a turnaround. An owner must keep in mind that the business will sell for a
multiple of earnings – possibly five times earnings. Therefore, if you were to decide to run the business for one
more year in order to earn, say $200,000, if you should make a mistake and not
have those earnings available in the subsequent year, you could be sacrificing
$1,000,000 of sales value in the marketplace.
(2) Sell when the risks are lowest for the buyer – that way the
buyer can afford to pay more for your business!
Risks are lower when your industry is doing well, there are no
threatened laws or regulations which could seriously impact your business, you
have a well-trained, experienced and stable workforce, there are no new
powerful competitors entering your market, etc. Don’t expect that the market will pay a very good price for
a business going into problems.
(3) Don’t be at a disadvantage.
Therefore, don’t wait until you develop health problems to sell your
business. It has been said that
life cycle is more of a driving force in business sales than the business
cycle – if you are forced to sell for poor health you negotiating leverage
will be seriously deteriorated, and there will be greater risks for a buyer
who will not be able to depend on you for help, counsel and support during a
transitional period. Another
disadvantage to avoid would be a sale to resolve family conflicts or
partnership disputes. These
elements will result in diminished negotiating strength and, once again, will
be perceived by buyers as an indication that inadequate transitional support
may be a problem presenting risks for them.
When Wimmers purchased Bassetts, Dale Bassett was in good health, eager
to provide help and consulting services and in fact, started a new career in
consulting in a related industry. Furthermore,
Peter Bassett was available as a key management participant to assure a smooth
transition and reduce risks in the transfer.
Wimmers could pay more and Peter now enjoys working in an industry he
loves, with a company maintaining high integrity and high quality standards.
(4) Plan your exit in advance.
Given the time it takes to sell and transfer the business, an exit plan
should be developed at least a year in advance so that appropriate
professional help can be recruited, financial statements can be purified,
risky elements of the workforce can be solidified, and most importantly,
external timing elements can be identified and monitored for their optimal
impact. In general, maximum value
will be derived when interest rates are low, there is ample financing money
available, many buyers are chasing few deals, the economy is growing, your
industry is growing, there is no threatened legislation affecting your
industry, and you and your business are both doing well.
Reprinted from
M&A Source/Keate
Partners Ltd. |
|
|
Keate Partners Ltd. 7783 Five Mile Road Suite A Huntington Bank Bldg. Cincinnati, OH 45230 (513) 241-3700 (513) 852-8325 Fax www.keatepartners.com
|
||
