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Have You Thought About Selling Your Business Lately?
Rich Hall
Silver Fox Advisor
July 2024
You should…think about it, that is.
It’s estimated that 80% of a business owner’s wealth is in the business. That’s a lot to risk without a plan.
According to Exit Planning Institute:
• 50% of business exits are involuntary caused by events like death, disability, disagreement, divorce, and distress.
• 70% of businesses that are marketed to sell do not sell.
• 80% of businesses that transition to the 2nd generation fail.
Why?
Most business owners do not have a plan to exit their business. They go to market with the business “as is” and learn that what they feel it’s worth may not be close to what a buyer is willing to pay.
Here’s an example:
A business generates $7.5M in revenue and provides a net income of $1M. The owner put it up for sale and had interested buyers. After performing their due diligence, they all walked away. It came down to these factors:
• The business relied too heavily on the owner.
• A high % of the revenue came from a single customer.
• Top salesperson was retiring.
• The owner wanted more than it was worth.
• The business had many discrepancies in the financials.
What could’ve been done in hindsight?
Maximize Value with Exit Planning.
The first phase is to determine your personal goals, the finances required to fulfill them, and your goals for the business. This is followed by an assessment of the business’s attractiveness to the outside market and how ready you and the business are to transition to another owner. Finally, there’s a valuation of the business to determine a range in which it would sell for today.
The assessments help determine where in that range the business would likely sell. If the value exceeds your financial goals, you can proceed toward a transition. If not, you know the areas to work toward to improve the value.
What are some common things that increase value?
• Reducing the dependence on the owner(s).
• Improve leadership capabilities of management.
• Clean up the business’ financials.
• Document systems and processes.
• Diversify customer base and revenue.
• Identify areas of high risk and address.
The typical timeline to prepare for and exit the business is around 3 years. Expect at least one year for the business to sell and two years for the assessment phase followed by the value enhancement initiatives.
What’s the primary takeaway?
Learn what drives value for your business and develop a plan to become a value-based business versus solely focusing on income. In doing so, you’ll fulfill your goals for yourself, your family, and your legacy.
Rich Hall
Certified Exit Planning Advisor | Business Advisor
Business Tips From the Editor - July 2024
BUSINESS TIPS FROM THE EDITOR
July 2024
Richard T. Hendee, Editor
The Silver Fox Advisor
“Cash Flow Modeling”
Over my business career I have seen, read and even written many articles regarding understanding and building cash flow modeling. Cash flow is the life blood of any business. Without adequate cash flow employees may not be paid, suppliers may not ship their goods, landlords may threaten to bolt the doors, and taxes may not be paid in a timely manner. But yet even with these horrifying threats many business owners still have not taken the position of mastering cash flow modeling, let alone understanding cash flow.
During my banker days, I remember many times I heard comments like – “My business is having a great year. Sales are up, and our new location is generating a lot of traffic. My account receivables are up, but we don’t have enough cash to pay all our obligations, and all I need is a short-term loan”. My reply was generally, “That’s wonderful your business is doing so well. How much do you need and when do you think you can pay it back?” Often, I would hear a reply along the lines, “How much can I borrow and I think I can pay it back in a month or two?” How can a banker make a decision to loan money based on that response?
Cash flow is a somewhat easy process to understand. It is basically the cash on hand plus what collections of receivables will be or cash inflows will be from cash sales less what payments need to be made to suppliers and regular recurring expenses like payroll, rent, insurance, utilities loan payments, etc. If the number ends up being negative, then decisions need to be made as to how much more cash sales can be made, which collections can be sped up or who can be paid at a later time. If the number is positive, then you are good to go. There are other factors that can enter into cash flow modeling, like sale of assets, purchasing of services, etc., but I will not go into those here because it may confuse the basic elements.
Often the preparer of a cash flow model will get hung up thinking this needs to be as accurate as possible, and a lot of time is spent trying to zero in on exact numbers. Cash flow modeling is similar to doing financial projections and forecasts in that it will likely never result in exactly what actually happens. What cash flow modeling is all about is providing a tool that will help the business owner make better decisions about cash, and the availability or lack thereof, with some good modeling or forecasting before a crisis situation develops.
If you need help or assistance with cash flow forecasting or modeling in your business, talk to a business advisor who has knowledge and experience in cash flow analysis. We encourage you to visit our Web-site at www.silverfox.org and learn more about the Silver Fox Advisors, and how they can assist you with your business needs, as well as to discover more about our great programs and community outreach endeavors.
