EP 117: Planning Your Sale in 2024

Welcome to another episode of the defenders business value podcast. I'm your host, Ed Mysogland. And today, we are going to be talking about planning your exit in 2024. And while I've touched on this topic, you know, a few times over the last 116 episodes, I do a fair amount of speaking. And the funny thing is that I keep on bumping into the same questions at all of these Association events that I speak at. And it centers around time. And the reason I want to revisit planning your exit in 2024. Is that right about now which the recording will be coming out in. In early March, you're meeting most business owners will have met or are meeting with their accountants to talk about their taxes. And this is a great opportunity for you to to explore is 24 the year for you to sell your business. And so what I want to do is address some of the things that you need to be thinking about in having that conversation. Okay, so what business owners don't understand is the time it takes to sell a business. So the average time, and this is like 56% 56% of the time, it takes between six and 12 months to sell a business. But let's take a step backwards. What does it take to prepare the business for sale and prepare you for the sale? Therein lies one challenge, you know, you're talking six months to a year to prepare the business, get the the financials in shape, get the pre due diligence information, gathered it before you hit the market. And, and so a lot of business owners, that's a total shock. And then the other side of the transaction is a transition out. So you're talking six months to a year to transition out. So you got six months to a year, at the very beginning to plan the sale, you have six months to a year in executing the sale and then you have six months to a year in in the ultimate exit and transition of your business to the new buyer. So you're talking, this could be about a three year process for you to exit. So you need to be in a position to understand how long it's going to take and back into your plants. So and now that brings us to our next our next topic. Let's let's talk about clarifying your exit motivation. Why are you exiting the business? You know, the John Warrillow from Built to Sell radio, he has a real interesting, let's say an e book, but let's just say an e book that, that he talks about push and pull factors. You know, so the push factors are what's driving you away from the business. And, you know, like I was at this association meeting this past this past week, and it's like, you know, I'm tired of people, people, people and vendors are just, you know, it's just hard and 2024 You know that trying to hire and retain people. It's just that that's causing people to, to and business hours to want to get away from the business. And then pull factors are, you know, a lot of people want to move into retirement. And this is a little bit of a tricky situation. Because on moving. If you're looking at retiring, it's what are you what are you going to do? What are you just saying, Hey, I'm going to golf every day or play tennis or play pickleball every day? That's that's great. But is that enough to, to spend the last third of your life and maybe it is a lot of people? It is but for most people it's not. So there has to be something, you know, you're you're kind of reinventing yourself and that's one of the challenges that a lot of business owners don't understand is they they become they become part of emotionally invested in their business. And so when they sell, there's a part of them that that goes with that sale and it's hard to redefine who you are and what your identity is. So you got to give that Some font on what you're going to do and why. So, so I would suggest, you know, as far as this particular section, I would look at, alright, you need to do a T chart, you know, what drives you from the business and what drives you to post sale asterik attributions. So I would, I would focus on that, the next step is you want to align your exit, you know, the type of exit you want, and the reasons for leaving. So, there's, there's a variety of different ways and for the most part we're in, in my world. Now, let's just talk about the, the majority of the time, either you're, you're, you're gifting the business, you are, you're gifting the business, or selling the business to a family member, or you're selling the family, whether you're selling the business to key employ a third party, or somebody within within the firm. And so you have to kind of align your motivation as a business owner with the kind of exit you want, and the kind of buyer that you want. So we have seen all kinds of, of business owners doing really remarkable things for their, for the people that they're selling to, or, yeah, people that, you know, especially individual buyers, you know, there's a lot of times you're seeing the business owner can see what got them into the business. And how are they, the buyer that looks just like them, when they were their age. And we have seen all kinds of transactions that defy, you know, normal, rational dealmaking because they, they see, they see that person and, and they, they want that person to pick up where they're leaving off. Now, I can tell you that that doesn't happen all the time. It happens a lot, you know, with key employees more so than then third parties that are coming in. But nevertheless, it does happen. But my point on aligning the type of exit you want is, who is the buyer that you want? And are you looking at, at legacy? You know, okay, well, that may be your, your employee, your your your, your kid, other management team coming in maybe even an ESOP. You know, if you're looking at at a business, that you're trying to establish legacy, that's one thing if you're looking to maximize value, well, third party is probably third party and third party can mean individual financial buyers, strategic buyers, or private equity groups and all those, all those different buyer pools have different types of people buying. So an individual is looking at replacing you and and you know, kind of Buy Here Pay Here thing what regardless of the the debt that they're using, whether it's SBA or seller financing, regardless, they are looking at creating earnings that will pay them pay their debt and get a return on their investment, strategic buyers, however, they're they're looking at buying market share employees now cost economies of scale, those kinds of things. And is that the right buyer, I don't know it really, I can tell you that through our practice, and bringing strategic buyers, strategic buyers have different ways of looking at the particular business and what where they see value. And each, unfortunately, you have to go through the process in order to figure it out. For the for our sell side clients. And then lastly, you have private equity groups where you have basically two versions one either it's a platform company, you're the platform, and they're buying you and then they're going to bolt on a bunch of other businesses to you to create a larger
a larger business and then they're going to sell it. Conversely, you may be the bolt on they may have a platform company that makes sense that at by adding you there's economies of scale and and strategic purposes of your addition to their portfolio. So again, when you go back and think about the type of exit you want, it really comes down to you know, who do you want to sell to? And again, you may say, Well, whoever pays me the most well, I get that. And I can tell you that when you start receiving live fire from from buyers that That doesn't really hold true, highest price may not be the best offer. And unfortunately, you just have to go through the process in order to figure that out. So next, which leads us to our financial goals, you do have to figure out valuation. And you know, what the market how the market sees your business versus how you see the business, you really, really need to understand both. And the biggest, the biggest reason behind that is that the market may not see you, the way you see the business, because you may have just been in it for so long, that you that, that you don't have the same clarity that somebody with fresh eyes looks at your business. So the risks associated with the company are, are considerably different. And I always, you know, I use the example that, you know, somebody was looking at buying our, our m&a shop, you know, there's substantial risk here, I don't see it, because I'm in it. So I know the people I know, I know who's the flight risks, who's not I know, you know, our lead gen and how it works, I know our relationships with our, our strategic partners and centers of influence. And at the end of the day, a third party coming in here, they don't have that, I mean, at all. And so the it's substantial, there's substantial risk coming in now, somebody, somebody that's in this in our space, they would understand it, but there's still risk. So my point is that, you know, you need to you need to get your arms around what valuation looks like to you. And then how you see it with the, with the, how you align with the market. And you can, you can certainly get a third party, your appraiser have a conversation with a an m&a, valuation, valuation person, most m&a shops are more than happy to kind of tell you what the market is and what's going on. And, you know, the appetite for your type of business. The next thing you need to do, as far as your financial goals, you have to to get your arms around, you know how much you need to retire. And if that's the path you're you're taking, it may not be what you thought, and so, so you have to be in a position to understand value and how you're going to receive it. Like, for example, businesses where there's a ton of personal goodwill and personal goodwill is, that means the value is tied up in that particular practitioner owner, there may be a long, a long performance based payout, where you don't get it all at one time. So you have to figure out, okay, if I'm, if I retired today, and I'm going to get paid out over the next five to seven years, what does that look like? You know, and that's, that's where it becomes instrumental and working with a, with a financial planner to talk about, what do you look for, like financially post sale. And then, when you're planning an exit, you have to examine how much it's going to cost you to do this, you know, the, the m&a advisors aren't cheap. You know, we like to think that we we bring, you know, we had, we pay for ourselves at least two times over just by virtue of taking you through a process. But you, depending on the size, I mean, you're talking anywhere from five to five to 10% of the purchase price, depending on again, back to the size, you have legal and legal and accounting fees. I always say that, you know, that it's good to bank on another one to 3%. There. And so, so you can see if you're, you know, a smaller businesses, a smaller business, you could be paying in between eight, eight and 15% of the purchase price in various fees. Now, while that seems like a lot, it may not, it may not necessarily be because you got to remember the by the team that you align with, is going to a hike on our side of the shop where we are our side of the deal team. We're looking at growing, maximizing the value. The the accounting is looking at minimizing the taxes and the legal is keeping you out of trouble. But my point is that you can see how by working together those fees that are paid are certainly well worth it. So Next, you have to figure out what your future role is. Alright? You know, it depends on, on you really, I mean, there's a, there's a lot of business owners, especially these days, and with, with people not wanting to retire, you know, I've got a partner, that's, you know, he's in his mid 70s. And he's, he's rockin and rollin, he's one of our top producers and he, but he, he is surrounding himself with other practitioners that are helping him, you know, continue to play a massive role in our, in our practice. So my point is, age really is doesn't have a whole lot of bearing, it has a lot more bearing to do with endurance, and competency. in industries where there's a lot of change, you know, if you're retiring, you may not be up on the latest changes, but somebody in your, in your firm or, or, you know, there's, there's ways to offset that. But my point is that look, you may be, you may be a consultant for the firm, you may be a shareholder for post exit, that is, and the biggest thing is, it all depends on you. I mean, the SBA came along, and, you know, there's fractional, there's fractional interest, acquisitions going on right now where, you know, you can, you can stay on the cap table, you know, indefinitely, you can be paid as a consultant indefinitely. And that's a bit, these are all big things. So my point is that you're negotiating your future role is a is ideal, over and above the, the purchase price, or in lieu of purchase price. So you got to decide that. And then lastly, you have to decide on what's important to you. And is it maximizing the value and, and exiting totally, to stay in with the business and betting on the calm, and literally everything in between? So that so my point to you on this is, you just need to figure out? And again, you this isn't an answer for, for for, for me to make for you. But for you to make for me, is everybody, everybody wants the huge payday so they can go. So all the risk is on, we have on that buyer that acquired the business, I get it. But more than that, is and most business owners are, are not inclined to enjoy just receiving that huge payday and going away. I'm just I'm just telling you that, that the ones that that we speak with, and they're they, they liked that they got their chips off the table. But there's they still struggle on what they do next, and that there's a lot of time. And there's a lot of living to do. And the bit and business gave them that joy. So my point to you is that explore what makes you tick, and what's your willingness and appetite post sale, because any any business owner that is willing to remain for an extended period of time demonstrates that they believe in the company, and they stand behind
the investment that that they just sold to the buyer. So look, as we conclude today, the you know, the biggest things are you need to understand time, you need to understand how long the time it's going to take to sell the business and you need to understand what makes you tick, you know, are you seeking the highest price? Are you seeking just to reduce risk? Anytime you begin down this path, I mean, and I can tell you just exploring it you're miles ahead of so many that just show up at my doorstep and they want to sell their business so I applaud that you even listen to this and and start thinking about the exit you know as you're going about your day, you know evaluate what your life looks like without this business. And, and and then kind of back into Okay, well how can I get there and again, there's nothing wrong. You know, every every business are is going To exit their business, whether it's voluntary or involuntary, and at the end of the day, it does, I don't wanna say, it doesn't matter. But my point to you is that, the biggest thing that I want to share with you is that you can control it if you if you get your arms around it, and you understand you can control it. And it's just a matter of velocity. So, my point to you is, is take take the time, and think about what your life looks like post sale, and what it is, personally, personally, what is your life look like financially? What does it look like? And, and what is the business look like? And if you answer those questions, you you can't make you can't make a mistake. And my my, my door is always open. I'll let you know if I have to turn on the meter. But generally speaking, I'm I'm getting these questions on a regular basis. And I'm happy to help. So I hope you enjoyed today's episode. And if I can be of any help, let me know. Have a great day, and we'll see you next time on the defenders of business value.