Not so fast. It’s common for a 60-something business owner to count on finding a buyer, selling for an attractive figure, then live off the proceeds for the rest of his/her life. But, when you look at real-world cases, it often isn’t true.
The fact is most business owners soon learn they may not be able to afford retirement after all; and, it can affect those with companies worth $20 million as easily as the smaller business owner.
Some reasons involve the economy, credit, and changing industries; but, sometimes there’s another wrinkle: The owner was counting on supporting a pre-retirement lifestyle; and, often, that just isn’t the case.
But, as I indicated, there are other issues. Many businesses that realized huge gains fifteen or twenty years ago may now be looking at flattened growth curves, which means margins have been squeezed as costs have risen. And, regardless of the revenues and margins that may fit neatly into those purchase formulas so many accountants may like to use, the reality is that a company with a 20% growth rate might be worth three times more than a flat company to a financial buyer.
Note: Financial buyers buy for what a company is worth to their bottom line. Strategic buyers buy for what it can mean to their own company, i.e., maybe to remove a competitor or to vertically integrate their manufacturing or distribution chain, etc.
Most owners, of course, have never sold a business before and are emotionally attached to their companies – a situation that virtually always results in an inflated idea of what their business is worth. They tend to have this mental picture based on some multiple of revenues or earnings – a formula they read or heard was the ‘norm’ for their industry.
But, valuing a business can involve costs many owners don’t want to pay. But, success planning requires advance planning. Unfortunately, sometimes even the owners’ most trusted advisors are jealous of their relationships and can get in the way. I’ll never forget meeting with a owner and his CPA over lunch one day and the CPA said to me, “Tell me about your scheme.” I could tell immediately, the desire to preserve “go-to” status overrode the client’s best interest – and he couldn’t see it.
Finding a successor who can run the company well – who wants to take back a failure if it doesn’t work out? – isn’t easy. Often, the best are home-grown employees or employees brought in for that purpose at a later date.
Investment bankers may not be interested in looking at companies worth below $15 million; and, those that are will likely need to have a full-blown audit, as well as a well-rounded operating management team. An owners key people are just that: Key to the value – and future value – of a company. Too often, owners neglect the “golden handcuffs” that make their company attractive to a future buyer who will want reassurance that top people won’t leave.
The bottom line: If an owner of a successful company wants to attract outside investors, the company should hae the same good governance as a public company – and board should go beyond friends and family.
Jim
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RESOURCES:
IFG Report: The Hidden Risk No One Talks About (registration required)
A Financial Conversation Checklist (does not require registration)
Subscribe to IFG’s Ezine: IFG Insights
Follow Jim on Twitter: @jimlorenzen
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.
The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.
