According to Forbes.com, 70% to 80% of businesses that go for an exit fail to sell—an alarming statistic. That's terrible odds for an aviation business, unfortunate odds for any surgical patient, and it's not great for business either. You want to be in the 20% to 30% success category. You won't get there for free, but the expenditure's likely to be worth it. After all, what cost can be higher than the price of failure? This blog explains how to achieve success and why you need help from a financial planner.
Reasons to (not) be cheerful
If eight out of ten businesses who want to sell, fail to sell, there must be something going wrong. Are business owners delusional? Is the universe conspiring against them? Could it be a case of repeated bad luck?
Some of these reasons might apply in part, but they aren’t the only reason:
The 8 key reasons businesses fail to sell (in no particular order)
- Poor documentation and records – failing the due diligence process
- A valuation gap – the vendor wants too much money
- Market sentiment and shifts – your product or service is on the way out
- Poor timing – holding on for too long
- Can’t let go – the owner just can’t stop being involved
- A lack of transition and succession planning – no real idea what to do next
- Owner reliance – the boss does it all
- Lack of preparation – not enough time was spent on planning
If you are an entrepreneur or business owner, do you believe any of these issues apply to you? Or do you have the perfect business? Time will tell.
It's more likely that one or two of these factors resonates with you. In which case, great news. Finding out what your issues are now, means that you have time to put things right.
Why you need a qualified chartered financial planner
Entrepreneurs view their business as their ‘baby’. You created it, nurtured it, watched it grow, and lost sleep over it.
Nobody, and we mean nobody, is allowed to come and tell you that your baby is ugly. In your eyes and in your heart, your baby is beautiful and a one-off.
By thinking like this, you will stumble at some point during the pre-sale process. If you are too emotionally engaged with your business enterprise, there are a lot of cold and calculated accountants, lawyers, bankers, M&A partners and purchasers who think differently. And they are the ones with the money.
You need a professional on your team, who understands the pre-sale environment, who can act as your coach and guide. To be a sounding board and give you candid second opinions. Someone who is on your side, but not emotionally attached to the business.
Let’s walk through those eight factors and see how a financial life coach and chartered financial planner can help you get to the exit and beyond.
1. Poor documentation and records
Any buyer needs to see your data and your numbers. They need cold evidence, not warm words. This isn’t the time for fluff or waffle.
What you and your accountant have done to date may have been fine enough to keep you afloat. Now you want to swim with the big fish. Unfortunately, some of them are sharks.
Audited accounts submitted on time. All company taxes paid in full and on time. Improving and strong profit margins. A great balance sheet looking nice and clean. Bank accounts showing healthy balances and powerful cash flows. Schedules of debtors and creditors. Spreadsheets of sales, clients, seasonal variations, products.
Create a data room (real or virtual). Aim to have at least five years’ worth of detailed documentation, neatly stored and categorised. If your potential buyer can’t find what they are looking for, they will assume the worst.
If your accountant can’t cut it anymore, now is the time to let them go and upgrade. If you can’t answer questions raised by your financial planner, it’s time for more homework.
2. The valuation gap
This is an easy one. How much is your business worth?
Who cares? It’s the wrong question.
You need to ask yourself, ‘How much do I need from my business sale after costs and taxes to be able to live the life I have dreamed of with my family?’
The team of corporate professionals poring over your company books and assets don’t give a fig about your personal dreams. They want your business for as little money as they can get away with.
Your trusted financial planner will work alongside you to show you how much money you really need, and by when the money is needed. They are on your side and working in your best interest. That’s a huge advantage for you.
3. Market sentiment
Tricky. You can’t control or influence the markets or trends. If your product or service is facing stiff competition, there might not be any alternative options for you.
Consider your business as a cash cow. You are living off it. Your choice is to continue to milk it for years (the ongoing income play) or kill and eat it (the exit sale lump-sum play).
What do you do? On what will you base your decision?
Your financial planner will have the tools on hand to forecast a host of options and alternatives with you in real time. To stick and play or cut and run. Decisions based on facts not feelings. Evidence not emotions.
4. Holding on for too long
You might be put off from selling your business by thoughts like: 'The future prize is always bigger. Something better is just around the corner. One more year of profits will seal the deal. The children will be ready by then...'.
A lot of ifs, buts and maybes.
But too long may be too late. The ticking clock records another missed opportunity to start the next exciting phase of your life.
Wanting ‘more’ is a sign that you probably don’t know what enough looks like for you and your family. This is where your financial planner steps in. They gain a deep and meaningful understanding of your life, not just your wealth. They want to know who you are as people? What do you value and represent?
Wouldn’t it be great to know that you don’t need to wait?
5. Can’t let go
Some entrepreneurs have powerful egos. They are the dominant alpha male, always knowing best. Having worked in the business for decades, nobody knows or understands the inner workings like they do. A few are matriarchs with a vicelike grip.
Time moves on and catches them up. Well into their 60s, 70s or even the 80s. Losing touch with technology and trends, they often stick to the mantra “But this is how I built the business, and it worked for me”.
They talk of handing over the reins to the next generation of family or directors. Yet it never happens. Everyone else involved in the business is deeply frustrated.
The impartial financial planner can help to loosen the grip. They are able to expertly explain the issues involved if leadership remaining static, and also the benefits of letting go.
In The Godfather, the Corleone family had blood ties, but they took advice from a non-family consigliere for good reason. It made their ‘business’ more valuable and powerful.
6. No succession planning
This factor results from too much dithering. You have been presented with too many options and alternatives, resulting in total stasis. Do you pass the business on to your children and family? Or let the senior management do a buy-in? Perhaps a trade sale is better. Who knows?
Perhaps nobody is holding you to account or exerting enough pressure on you to make good decisions. Your financial planner can help there. They will help you to start with your ‘why’. Only when you know why you are in business and why you want to sell, can a solution be reached.
Once the ‘why’ has been resolved, it can develop to the ‘who’ takes over and the "when" they will take over. Traction and action leading to successful outcomes.
7. Owner reliance
We all know businesses like this. The business often carries their name. They are featured in all the advertising. The owner does the sales, the marketing, the financials and runs the board. There is nothing that happens without their involvement, even a photocopier contract. Most of the company information is undocumented, in their head.
They are the business ‘star’.
They know all of the clients/customers. They forged the links and drafted the terms with suppliers. The bank deals with them and nobody else. The company accountant and solicitor only deal with one person.
A competent and professional financial planner will shake the tree. They can provide an expert and impartial voice that explains the pitfall of being the only star in the team. Fundamentally, inaction could mean much less value at sale time.
The star differs from the ‘Can’t let go’ issue because they are often in their prime and could do many other things.
8. Lack of preparation
This is a time issue. Good preparation takes years. It takes foresight, effort and energy. Owners can’t simply wake up one day and decide to sell the same week.
Your business, like your home, needs kerb appeal before it sells. A bit of paint and polish. The books put in order. Debt and borrowing off the balance sheet. Staff costs curtailed. Cash in the bank.
Your financial planner will assist you with your calculations. Together you'll be able to work out how much time the planning and preparation will take before everything is in place and in good shape. And how much money or value will be needed before you're in a position to realise your business sale.
It doesn’t mean that your business can’t be sold in its current state; it just means it won’t fetch the price that you have in mind. But what if that price was already more than enough? Without a financial planner to arrive at that figure, you'd never know. The result means no need to spend time and money tidying up. Information is power as the saying goes.
The destination beats the planning
Not many people enjoy preparing. Consider the family summer holiday. It can take weeks of planning: destination, resort, hotel, flights, tickets, visas, taxi, currency, clothing, etc.
What people really look forward to is the actual destination: the first chilled drink at the restaurant by the harbour, the early evening sun shining, a warm, gentle Bougainvillea-scented breeze.
Once you can imagine your own personal destination in your mind’s eye, allow someone you like and trust to help with the planning and preparation. You won’t look back.
If you would like to make the most of your business contact us today to arrange a meeting with one of our specialist financial planners.