Are you ready to transition from ownership of your business?

I was mulling recently over several conversations I have had with business owners, as well as investors. For over 25 years I have bounced between the ownership and investment sides, sometimes straddling them both as an advisor.

Two things struck me most forcibly from those discussions:

1. Most business owners are not well prepared to consider succession issues,
2. There is generally a great disparity in perceived value between owners and buyers.

I went digging for some more data to support those insights. According to a study by the Exit Planning Institute (EPI), only about 20% of business owners have a formal exit plan in place. My own experience suggests that’s about right. The problem, though, is that without an exit plan, few owners are going to achieve the outcome they anticipate when the time to sell comes. Speaking with business owners indicates a range of reasons for this lack of preparation:

• Lack of Awareness: Some owners may not fully understand the importance of exit planning or may underestimate the complexity of the process, something I’ll touch on below.
• Time Constraints: Running a business demands a lot of time and attention, leaving owners with limited bandwidth to focus on exit planning. Finding the time to work on the business, rather than in the business, is a constant challenge.
• Emotional Attachment: Owners may have emotional ties to their businesses, making it difficult for them to consider and plan for exit.
• Optimism: Many founders are optimists by nature. It’s a trait that serves them well in overcoming the inevitable hurdles that come with growing a business. It’s also a trait that allows for things that are not of immediate importance to be swept aside. The problem, however, is that an optimal succession outcome requires significant early planning and action. Whether, it’s a generational transfer, an equity partner or an outright sale, each of those strategies will require an upfront and continuing effort.

Does it matter? Well, yes. A variety of studies indicate that only around 20-30% of small businesses succeed in selling. That number is certainly skewed by smaller enterprises, but even large, profitable companies can struggle to secure buyer interest.

There is a range of factors that come into play when private companies fail to find new owners:

• Overvaluation: Owners often have unrealistic expectations regarding the value of their businesses, leading to pricing issues. This is a big one. I’ve found that owners’ view on this is often shaped by outlier reports of very successful sales, speculation around price achieved, or by reference to multiples of publicly listed companies. Valuation of private companies is a complex undertaking and one that requires a mix of financial awareness and an understanding of how buyers or investors go about appraising a business.
• Poor Financial Performance: Businesses with declining or unstable financial performance may struggle to attract buyers or achieve desired sale prices. Introducing bullish forecasts for coming years does not overcome the reality of past performance in the sceptical eyes of buyers.
• Founder dependence: Larger companies tend to manage the separation of shareholding from management better, but for many founder-led businesses a failure to put in place a leadership team that has demonstrated its capability can either stop a deal or introduce undesirable requirements upon the seller.
• Market Conditions: Economic downturns or industry-specific challenges can impact the ability to sell a business at desired multiples. Owners almost invariably view their businesses as having an infinite life. However, whether it’s the Dow Jones 50 or a private enterprise, every company must face a transition from growth to decline. It’s not necessarily inevitable but, without a strategy to deal with it, differing views of the future can prevent a deal from being done.

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Ultimately, the value of a business is that point of equilibrium between the least that a seller is willing to accept and a risk-averse buyer is willing to offer. The key is to understand who the buyers are, why they will be interested and how they appraise a business.

I have seen some very successful outcomes when it comes to selling a business. The three things they all had in common were:

1. A founder who focused on an exit strategy, either from the beginning or well ahead of any possible sale. They had a vision for the business that included their personal goals; their strategy was aligned with delivering that vision; and they actively tracked their progress by conducting periodic appraisals of the value of the business.
2. They created enterprises that had strong processes, people and systems. They recognised that securing a buyer or investor was an exercise in perceived risk reduction.
3. Seeking guidance from people with direct experience in investment and sale processes was a natural extension of building the internal capabilities they had in operating their businesses.

There are an increasing number of businesses that founders have spent 30,40+ years building and are now wondering about how to step away. For that commitment and effort to generate the desired financial outcome, those business owners need to focus hard on an Exit Plan. They need to ensure that their enterprise is the one that stands out from all the opportunities available to buyers.

For more on these ideas take a look here .

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Avelin Group is an advisory firm that works with business owners to appraise business value, ensure alignment with vision and strategy and assist owners to sell their businesses.

Eaton Square is a cross-border M&A and capital services firm focused on services, technology and growth companies in the US, Canada, Australia, Asia and Europe.