FINANCIAL FOCUS: Succession planning: A contrarian's perspective
News Service May. 19, 2009, 3:56pm
CHARLESTON -- Determining when to begin the thought process for selling a business is often a product of the age of the owner(s) or financial need.
A more enlightened perspective may be to consider that your business is ALWAYS for sale. This view has the obvious benefit of maintaining a heightened focus on financial performance on an on-going basis. But, more importantly, this attitude of always considering that your business is for sale will most likely serve you better in terms of achieving maximum value for your business.
The first viewpoint business owners should consider adopting is that selling your business does not necessarily mean that you will completely step out of the business. Earn out aggreements and performance laden employment contracts are often a part of a buyout package. This has obvious benefits to the new, and former, owner(s). The transition of business ownership and operations is a crucial period and new ownership should recognize this and maintain a place for the former owner/operator. This is, of course, especially true for professional service firms such as legal, accounting and physician practices.
Valuation models for personal service businesses are a tricky proposition. How will current and perspective clients view a change in ownership? Client loyalty is very often closely tied to a relationship with a partner or key employee. This, and other issues are a true barrier to accurate valuations. One of the methods to overcome this challenge is to have your business valued on a regular basis. Besides the perspective it provides in terms of monetary value, the process is often beneficial in helping to understand strengths and weaknesses that can be addressed to improve the value of your business. Plus, a track record of professionally conducted valuations is a strong bargaining tool for negotiating a selling price.
Another benefit of truly considering a business that is always for sale is it will provide a focus on selling when the value is high rather than other factors including age and financial need. And even more importantly, it may prevent the necessity of selling due to declining financial performance.
An additional viewpoint to challenge your thinking is to consider what you may be able to do if you actually sold your business much earlier than you may have generally planned. Selling a business is too often timed as a prelude to retirement. After all, what's wrong with a scenario where you sell your business, accept a 3-5 year earn out contract, have money in the bank from the sale and begin a new business because you're not ready to retire?
Yet another factor that is advisable for owners of closely held businesses is to target potential successors early. A key employee, a regional competitor or another company who can benefit from extending their services are all excellent potential buyers. By targeting individuals or companies that may prove to be potential buyers, lines of communication are opened that allow the buyer and the seller to learn about the potential of a sale.
So, consider a contrarian focus for your closely-held business. This perspective doesn't have any significant downside and could lead to obtaining a higher value for your business.
Nistendirk is a partner at Woomer, Nistendirk & Associates, a CPA firm located in Charleston. Bob has extensive experience in tax accounting, strategic planning and financial/business consulting. He can be contacted at firstname.lastname@example.org.