We have found that entrepreneurs can fall into a trap; they fantasize their entire life about a liquidity event (selling their business), believing their life’s work will be validated when that happens. Yet the grass is not always greener on the other side. Most of them know they cannot realize a return on capital outside the business that remotely resembles the profit they’ve earned in a midmarket company. Plus, they need to find something else to do.

I always point out that divestiture is only one method of raising cash. In some instances, it may be advantageous for entrepreneurs to “take chips off the table” with a recapitalization, which often takes on the form of selling a minority stake in their business.

When the risks of running the business are far greater than keeping it, they should consider an exit strategy. That is, if cash flow is rapidly increasing, the math may favor keeping the business. If risk is moderate, the business owner may consider a recap.

Optimize consultants are purposeful about preparing business owners for such events, and have intentional conversations about their exit plan. There are several important considerations for business owners, which they should be planning for at least three to five years before a transaction:

  • Have they grown the business to a significant and relevant level that will attract buyers?
  • Have they carefully considered the attributes important to a buyer (depth of the management team, unique value proposition, scalable systems, and so forth)?
  • Have they benchmarked the business to understand its relative value when compared to similar businesses?
  • Has the owner considered the tax implications of a transaction, to minimize their exposure?
  • Have all the succession/estate plan elements been formalized?
  • Have they ensured that key talent is “handcuffed”?

We have found that business owners think a lot about the “transaction” and not about the activities that must be completed pre- and post-transaction. For example, creation of an ESOP (employee stock ownership plan) can eliminate much of an owner’s tax liability. Although ESOPs are costly to administer and create complications, they are one consideration in the intricacies of exit planning.

For this reason, business owners need to enter a value acceleration phase to ensure that certain pre-sale conditions are met. This may include activities such as pivoting to audited financial statements, or other actions that could mitigate risk for a buyer.

Companies can also borrow money to expand, providing the business owner with a respite from funding the business. In other cases, an entrepreneur may be better off keeping a business and putting an experienced CEO (hired gun) into place, reaping excess cash flow into their retirement.

Selling a business requires a team. At minimum, to sell a mid-market company, the seller needs representation from a qualified investment banker, transactional attorney, CPA and wealth advisor/exit planner.

To repeat, the value drivers are:

  • Unique value proposition and branding that proves value
  • Diversified markets and customers
  • Business model and sustainable revenue model
  • Financial health
  • Sales competency and customer relationships
  • Right people in the right seats
  • Leadership and culture
  • Technology and information
  • Scalability and service excellence
  • Planning and execution

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