This article was written in collaboration with John Hawkins of Paramax Corp.
John Hawkins’ 30+ year career incorporates a wide range of experiences including roles as an owner/operator of several successful privately held companies, senior executive of a publicly traded corporation, and as a registered Investment Banking Representative with Paramax.
Since joining Paramax in late 2014 as a senior executive responsible for business development, John has focused on educating, informing, and advising business owners and intermediaries alike on the value of the investment banking industry and why specifically Paramax is the regional middle market investment banking firm of choice. To date, he’s sourced engagements with clients in the oil and gas, healthcare, services, manufacturing, distribution, automotive, e-commerce, and jewelry sectors in both the private and public arenas.
Transitioning ownership of your small business can be difficult. How you handle passing on the enterprise to which you've dedicated most of your life is a difficult task from a legal, financial, and emotional perspective. If you are an owner of a privately-held business and are thinking about moving on to your next phase of life, read on.
Reasons for transition: why now?
There are many different reasons why a business owner may choose to sell. The most common reasons for ownership transfers include retirement, competitive pressure, financial difficulties, health issues, lack of an appropriate heir, or desire for liquidity.
While transition is a natural part of a business’ life cycle, it’s important to consider all factors when deciding the timing and terms.
Understanding goals: an imperative step
Once you begin structuring your transition process, it’s important to understand your objectives.
Unique factors influence each scenario succession transition differently. Just as the fact pattern of your business and your life is different from all others. Once you have thoroughly defined your objectives and priorities, you can develop an optimal exit strategy that will bring you the most value (both monetary and otherwise!).
Some of the many questions you will need to ask yourself include: Will I stay on as part of a management transition team? For how long? Do I want to retain a financial stake in the business post-sale? Do I care to whom I want to sell/transfer the business? Do I clearly understand what my financial needs are?
Asking these types of questions requires an owner to deliberately consider the future strategic direction of the business. Whatever your decision, the only way to choose an exit option that will best meet your needs after the transition, is only through a clear understanding of your personal and business priorities that you can choose the exit options that will best meet your needs.
Timing: is it ever too early?
All too many privately held companies are reactive in nature when it comes to planning an exit strategy. Whether it’s because they are caught up in day-to-day operational demands or emotional resistance to letting go of the business, they fail to have a transition plan in place.
Selling in a reactive mode will never yield the maximized value of proactive strategic planning. A sufficient time frame (two to five years) allows time for the company and its owner to:
- Build a proven effective management team to ensure future stability
- Establish customer and vendor longevity
- Clean up financial records and accounting systems to maximize value to seller and potential buyers and reduce potential last-minute reduction of enterprise value
- Strategically search for optimal buyers, understand their value drivers and ensure the company’s matching attributes are best positioned to maximize value
- Critically examine the company’s strengths and weaknesses and adjust perception accordingly
- Continue to run the business as normal, once the time does come for a sale, without losing value due to distractions
- Plan early, which can dramatically increase the leverage a seller will have prior to negotiations with a buyer
Tips for making the deal
Mind the Store: Many times, when an owner becomes involved in a transition process, especially if they are attempting to run the process themselves, it becomes very easy to lose focus on the day-to-day operations of the business and value is lost.
Stay on the Same Page: Keeping all individuals coordinated throughout the process can be a complex task. Failure to do so only results in the process being delayed.
Get the Right Expertise: When it’s time to run an exit process, go to those who are the experts in transactions and at running the transaction process.
Manage the Business Until Closing: Don’t assume that a deal is done until the ink is dry. Once you emotionally commit to the transition being complete and have mentally left for the beach, your decision making becomes compromised.
Know that Dollars are Not the Only Factors: You may be tempted to jump into the deal process upon receiving an offer that looks enticing. However, a promise of more money with more contingencies is not always the preferred route. Take time to understand the present value of structured components of consideration. Investigate whether the potential buyer has a good track record of sticking with original offers. There are many issues to consider: How quickly can they close? Are there financing contingencies? What additional due diligence do they want? In other words, what issues could stop you from signing this deal with this company?
Keep Your Options Open: Competition is a good thing. It’s possible to waste a great deal of time and money in the deal process with a buyer who makes an exciting initial offer but then, late in the game, shows no intention of closing the deal at that price or on those terms. Meanwhile, you may have let other suitors fall away or taken your eye off company operations, only to see the deal fall apart. Speed is good—but not for speed’s sake.
Be Up Front: Should a potential buyer find out negative information late in the game, it could result in a significant reduction in the price and could jeopardize the transaction itself. Present yourself and your company well but remember that numbers and facts that stick are always better than ones that erode.
Be Prepared: Don’t rush to market. Lack of adequate preparation before beginning the selling process is always a major pitfall. Optimizing value and getting to closing requires that you put your best foot forward, make your presentation polished and complete, and be prepared for questions.
Thinking of selling your business or know someone who is? If you have questions, you can schedule a call with us any time to learn more.
Manning & Napier is not affiliated with our guest writer or Paramax. The information in this presentation is not intended as legal or tax advice. Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation.