“The best-laid schemes o’ mice an’ men gang aft’ agley.” —Robert Burns
When starting the exit planning process, most business owners have an end in mind. It usually has three components: when they want to exit, how much they expect to leave with, and who they will sell the business to.
Sometimes they have to settle for two out of three objectives going as planned. Sometimes they can only get one.The “two out of three” scenarios are typically where the time frame and financial objectives don’t match. Some owners believe that, because they spend three or four decades working hard, the business obviously owes them a comfortable retirement. Their “valuation” is based on personal need, not business metrics.
In situations where time frames are problematic, it is often because the owner has waited too long to begin the process. He or she has a company capable of returning the necessary price, but it will take a few more years to get it ready.
In other cases, the owner is burned out and desperate to leave. Preparing a company for sale, finding a buyer, and negotiating a deal takes time. The owner’s most important job is maintaining a strong and growing business throughout the (highly distracting) process. Many transactions have failed, or the price has been lowered, because an owner paid more attention to the deal than to the operations.
With the marketing for buyers tightening, a number of owners are choosing to sell to their employees. An internal sale allows the business owner to choose and coordinate the time, price and buyer; but even that may not be enough control.
A few years ago I worked with the owner of a successful distribution company. Due to the dedication of three long-term managers, he had run the business from his home 1,000 miles away for many years. Now he had returned, expressly for the purpose of planning a transfer of ownership to his management team in appreciation of their loyalty.
The price he wanted was reasonable, and an internal sale would preserve their jobs and the company’s culture.
We were retained to help design the plan. In our initial assessment of the team, we identified a clear vacuum in the sales and marketing role. To the owner’s surprise, filling that position would cost about one-third of the company’s free cash flow, greatly impacting his initial price expectations.
Next we asked the key management personnel to present their personal financial statements to the company’s banker for preliminary assessment. Her answer came back quickly: a polite version of "not just no, but hell no!” All three managers had made a complete hash of their personal finances, and would never be approved for business credit.
With that news, the owner realized that financing the sale himself, by taking a note from his managers, was a very high risk proposition.
This story has a happy ending. We helped the owner find a broker who specialized in his industry. The business was sold to a national chain, which paid a higher multiple than he originally expected. The managers all kept their jobs.
This owner accomplished his financial and time frame objectives, but only by taking a path that was the complete opposite of the one he initially chose.
In the words of Meat Loaf, "Two out of three ain’t bad.”