From the Desk of Dr. Guy Baker--Five Ways to Help Business Owners Sell

I played a lot of baseball growing up. One of the best pieces of advice my coaches gave me was this: "Guy, don't step into the batter's box without a plan."

My coaches wanted me to exude confidence whenever I stepped into the box to show the pitcher I wasn't intimidated. More importantly, they wanted me to know what I planned to do before every pitch based on who was on the mound, how many runners were on base, how fast those runners were, and where the defense was positioned in the field. Having a plan prepared me for certain pitches and where to place the ball based on where the pitcher liked to throw. When I stopped hacking away at whatever the pitcher served me, my batting average increased significantly.

It's the same when my clients tell me they want to sell their business. If they go to market without a careful plan and take whatever offer the first buyer pitches them, they're just hacking away and bound to be disappointed by the outcome.

Since you only get one strike (not three) in our business, here are five key areas that can greatly help the business owner get financially and psychologically ready to exit:

Emotional Considerations

Don't underestimate the psychological and emotional aspects of exiting a business. Many business owners have a deep personal attachment to their companies and haven't thought about what their lives will look like post-exit. If they're not prepared, selling their business could be more like a death in the family than a joyous event. They can feel a total sense of loss and direction. While the risks and stress of running a business have been extinguished, part of them loved the adrenaline. That's a huge void to fill, especially when they suddenly have 50, 60, or 70 hours a week of free time on their hands. Some owners think they can fill the void with travel, golf, new hobbies, or other sports. Eventually, however, the allure of those endeavors pales compared to the rough and tumble world of entrepreneurship, and they get bored easily, give up on life, or return to the business. In some cases, they might start another business. But nothing will ever fill the hole in the owner's heart.?

I must ensure the owners I work with understand that they'll have difficulty coping with life if they can't set aside their passion for the business. Their marriage and relationships with children, grandchildren, and friends may suffer. I help the owner think through their options, identify activities that satisfy them, and give them a sense of purpose. In many cases, they might find fulfillment in consulting, coaching, mentoring, or volunteering. Regardless, they should give thought to these activities and find a way to diversify their interests before they sell.

No More Company Piggybank

I've seen many owners (and their advisors) forget to factor into the sales price how much more their personal expenses will increase after they exit the business. Suddenly, the owner must start paying out of pocket for items such as their cars, boats, country club memberships, travel, concert tickets, and dining expenses instead of running them through the business.

As an advisor, I can lend significant value by helping owners understand their day-to-day living expenses post-exit. Doing so well in advance of the sale will help the owner come up with a minimum sales price they can accept to support their lifestyle post-exit (post-piggybank).

Timing Considerations

Optimal exit timing depends on factors like market conditions, business performance, and personal readiness. Timing can be more complex than financial considerations. The owner should understand that their offer may be something other than an all-cash sale upfront. It's more likely to be cash and a note, and the note may be an earnout. When the deal is finally inked, buyers expect the business to remain at least as successful as it was when the founder was running it. They need protection in case the business falters due to factors such as the economy, new competitors, litigation, key employee departures, or technology disruption. This protection can change the deal by contract and significantly reduce the owner's total payout.

A contingency plan must be in place so the owner doesn't rely 100% on the sale proceeds for their financial security. Often owners who've invested significant personal capital into their businesses may have 90% of their net worth tied up in the business, hoping to free that money up when they sell. As the old saying goes, "Hope is not a strategy."

Instead, a contingency plan consists of two elements. First, it's about helping the owner build sufficient assets outside the company so they have enough income to live on if the company has cash flow problems or if the sale ultimately falls through. (Remember, three-quarters of businesses never sell.) The second element is a life plan. The owner must get very clear about their life after the business. The sooner they put a plan in place, the better their chances of living a productive and active retirement life. Hint: Getting the life plan right takes a lot of tweaking and tough conversations.

Operational Readiness

Preparing a business for sale or transition can take years because it includes streamlining processes, building a strong management team, and reducing owner dependence. I encourage my clients to think about how they can make themselves "operationally irrelevant." Can they be away from the business for weeks and still have everything running smoothly? Getting to this point isn't easy, but it will do wonders for the owner's stress level and greatly increase the company's valuation.

Unfortunately, most business owners aren't able or willing to make these tough decisions. That's why SCORE data finds that only 20% to 30% of businesses that go on the market eventually sell—and even fewer sell for what the owner hoped they would fetch. That's where advisors come in.

Legacy Planning?

Owners often care deeply about preserving their company's culture, values, and impact after their exit, which goes beyond maximizing financial returns. It isn't unusual for the owners to be caught off-guard when the sale hits. When the day of departure comes, they're leaving behind a huge part of themselves. They're prone to asking themselves, "What difference did I make in this life?"

Unfortunately, for many owners, the answer is de minimus. Because of their relentless focus on the business, they may have broken marriages, poor relationships with their children, and an emptiness they filled with the company. When the company is gone from their life, there can be an even deeper emotional void to fill.

Pre-sale legacy planning allows the owner to identify the causes and organizations they most want to help (with money or volunteer time) and how much of the sale proceeds they want to go to children, grandchildren, or other family members, determining whether their beneficiaries are mature enough to handle their windfall in its entirety or if they should parcel it out in stages as they get older. These decisions all have tax consequences. Addressing these issues well in advance can give the owner significant peace of mind, better timing and deal terms, and more clarity about the minimum.

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