Think you or a client may sell within the next few years?
Here are key questions to answer at the start of the succession planning process:
- Why are you selling? This is the most important question. Leaving your baby to someone else's care and going through the stress of a transaction are not easy to stomach. The process becomes much more palatable when you know why you are going through the pain of succession. Your 'why' will keep you grounded when things get tough.
- When will you exit? It takes at least a year to sell a business on the open market. It can take even longer to increase the value of your company by improving customer concentration, the leadership team, processes, financial record keeping, and increasing EBITDA. Identify a realistic exit date and work backwards given the work needed prior to offering your business for sale.
- How much EBITDA do you need to hit your cash goal? Buyers of your business (internal or external) will value your company by a multiple applied to adjusted EBITDA. If you know that the average valuation multiple for your industry is 2x, it is easy to work backwards to compute how much you will need to grow your company to hit your goals. For example, let's say that your EBITDA is $500k now and you want to retire in 5 years with $2M. If the prevailing EBITDA multiple for your industry is 2x, this means that you need to grow the company to $1M in EBITDA in order to hit your goals at exit.
- How much cash will you need? Speaking of hitting your cash goals, do not forget about debt repayment, broker fees, and taxes. Start computing these expenses at the beginning of your succession planning process. A week before closing, many business owners start freaking out about their net proceeds after taxes and debt repayment. Although the value of your company is not based on your net proceeds goals, owners should know how much cash they need to walk away from the closing table with. See your wealth manager and CPA as soon as you start planning for an exit.
- Who will take over the business? The most attractive businesses have a general manager or leadership team in place who can continue to run the company in the owners absence. Identify, hire and/or train that person now so they are ready to take over the business when the time comes.
Jamar Cobb-Dennard is a M&A attorney and business broker. Learn more about how to buy and sell a business on Jamar's podcast, What's it Worth?
