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A Business Success(ion) Case - It's a Process, Not a Liquidity Event

Thoughts from Dunnington Consulting - A New England Consulting Company
Where to Start - Get the Facts, Identify Blind Spots, Test Assumptions
November 6, 2020 at 5:00 AM
by Dunnington Consulting
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Several years ago we met with the owner of a successful engineering/manufacturing business who told us he hoped to exit in the next few years, but hadn’t really done much thinking about it. In fact, he said he’d really shied away from it. The conversation covered some important territory, for example:

  1. Twenty-two years in business, but he’d never had a business valuation. We mentioned our experience that virtually everybody overestimates the value of their business… and that it’s smart to know what it’s really worth. Like going to the doctor – it’s good to know how healthy (or not) you really are.
  2. He didn’t know what he would have to sell his business for to be able to retire, or when that could be possible, but it was the lion’s share of his wealth, thus certain to be the major determinant in his financial future. Seemed like “a far-off set of uncertainties.”
  3. When asked if he knew who he wanted to transition the business to, he responded: “I guess I will sell to an outside buyer.”  But he didn’t seem especially excited about that, and with further dialog, we learned that he was under the assumption that selling to a third-party was his only option. He also shared that his real desire was to sell to a key employee who had been instrumental in building the business, and a son working in the business. He had already spoken to a strategic buyer who had expressed interest in buying his business and expanding into the area. But he wanted to keep working, and felt some real loyalty to these two people in his company. He wondered whether they would have much of a future with strategic buyers as new owners, and whether they’d be likely to dismantle the business he’d spent twenty-two years building.
  4. He said he hadn’t thought much about business succession or what he’d do next. Just operating was taking most of his time. He said he was beginning to feel an uncertain time approaching - bored at times and burned at others. “Exiting” he mused, seemed more of a “liquidity event than a business process, and might not take much time.” (Our experience is that it takes a year of preparation for every decade of operation, plus time to put the deal together and carry out the transition.) We shared a finding from the Exit Planning Institute that 74% of owners who sell their company report being unhappy a year later, regardless of how much money they’d made …. mostly because of how well they had (or actually hadn’t) planned and prepared. We observed that how you exit is a bell you can’t un-ring. Planning and preparation raise the odds of creating what you want – otherwise you’re waiting for fate to do its work.

The Course of Action: Build Value Toward an Intended Future

We suggested that if he didn’t wait until the last minute, got a valuation, got smart about exit options, figured out a target value for his business, planned how to build its value and got on the path to being transition-ready, he could create a secure, intended future for himself and his company.

As-Is, To-Be: It’s About Syncing Up Financial, Personal, and Company Readiness

Fast forward four years. In late 2019, he successfully transitioned his business to his son and the key employee. With our help, he had gotten to the point where he was financially ready, the company and its new owners were ready, and he had a personal plan for a secure “what’s next” future.

From Uncertainty to Tangible Results - Get Traction, Build Value, Finish Big

The business valuation revealed the priorities for getting transition ready: become owner independent, grow more predictably with more recurring revenue, sharpen cash flow management, achieve higher NPS (customer recommendation) scores and strengthen the workforce with cross training and clear incentives to engage in the value building strategy. With these underway, and as part of getting transition-ready, his son and the key employee also carried out a major risk-management/business continuity effort together – which accomplished much of the top-level value building, strategic planning and leadership development in one swoop. All together, these initiatives made the company run better, it grew more profitable, easier and more fun. As a result, the owner handed off more and more of his role, which brought him more time and financial freedom, which helped him prepare personally for his life after exit. The changes also attracted the interest of a number of potential acquirers, and yielded several offers that were at 4x to 6x the typical multiple for his industry. Having these options proved to be helpful in talking with investors about arranging the financing to do the transition with the owners he really wanted. One unexpected and very positive outcome came from moving more of their business online – which strengthened their capacity to adapt when the pandemic hit in 2020. When the founding owner finally retired in June, they were on offense moving to acquire a key competitor.

We are all challenged to create the future we want. The moral of this story is to think ahead and test your assumptions about how you will eventually exit your business. It’s not whether; it’s how best. It’s smart to have an expert help you test those assumptions because you don’t know what you don’t know, and you may not even recognize where you’re making assumptions. It’s much more than a liquidity event and it takes time. Our client had assumed he would not be able to sell his business to whom he wanted to, and had actually started down a path that he really didn’t want to travel down. With the right help, his assumptions were identified and tested, and in the end, he was able to do what he really wanted to do.

For help building value with an intentional end in mind, schedule a call and don’t bring your checkbook – it’s free. We love talking with owners.