Risky Business

If you are an entrepreneur, you know risk. From the first day that you gave up being an employee and receiving a regular paycheck to become the founder of a company without any business income except in your dreams, you are an entrepreneur. Now, that’s risky business! However; the entrepreneur probably didn’t consider it to be too risky. For the entrepreneur, while risk is recognized and calculated, it usually takes second place to the dream of being in control of one’s own destiny.

It is risk that is the fuel for the entrepreneur’s energy and drive. It’s not surprising that the first few years bring the entrepreneur great success or, if there has been a misstep or miscalculation, great failure. Yes; entrepreneurs do fail. But usually, that failure means only that experiencing failure will lead to new opportunities. However; this time when undertaken, there will be the added benefit of knowledge gained through failure.

Fast forward 15 or 20 years. There have been many ups and downs, but the beat has continued and the company has done well for the most part. Facing risk is different now because there is more to lose. Personal wealth has increased through prudent investment and minimizing an extravagant lifestyle. Instead of progressing with giant steps, the steps are now much smaller, or even mini steps.

Probably always, in the back of one’s mind, is the thought of selling all or part of the company. How does one take prudent steps that will result in a divestiture that works?

First, let’s assume that this will take place in the near future (1 to 3 years) and that the customer base is strong, with low concentration.

Two. Take realistic stock of the company, looking for weak spots that can be corrected in the short term.

Three. Analyze the debt structure, taking steps to reduce all debt during the short term (Remember; debt stays with the seller at the time of a sale).

Fourth. Make a list of certain expense items that will not carry forward, so that these expenses can be added back to profit.

Fifth. Develop plans for timing, advisors, expectations and a personal plan for after the sale.

Now; back to risk. Yes; there is risk associated with selling a company. The good news is that most of the risk can be mitigated when the selling shareholder(s) take prudent steps well in advance of marketing the company. Those steps include:?

1. Seek qualified professional advice (M&A intermediary, attorney, CPA). (Friends are friends, and not necessarily good M&A advisors) to gain some understanding about the process.
2. Fixing what needs to be fixed in the company’s operations, financial reporting and customer relations.
3. Tracking profit. Separate actual profit from expenses that will not carry forward under new ownership (add backs), arriving at adjusted ebitda).
4. Develop a list of criteria describing an ideal buyer.
5. Minimize those that know about your thoughts about selling the company. The fewer that know; the better. Those that do know should be subject to NDA.
6. Mindset adjustment. When one’s company is sold, that owner is now the former owner. It takes time to adjust to this new identity. However; be assured that the adjustment will take place and most look back and are happy to have the opportunity to have a new identity.

So, if there is risk when a company is sold, where is it and how can it be eliminated? While it can’t be eliminated 100%, common sense, good planning and realistic expectations can mitigate most risk. Additionally, anticipating certain problems and preplanned solutions for those problems will further reduce risk.

It’s not a benign process, but it will usually turn out to work for everyone if a well thought out and planned approach is taken.

Now; the transaction has been completed, so it’s time to move on to the next venture or adventure. Take your pick.

Gary Penrod

Gary Penrod and Associates, Inc

[email protected] ? 843 290 3574 (cell)