Your clients are starting to think about business succession and even possible business exit. (Or perhaps, they should be.) But, how do you, as an accountant, CPA, financial planner or attorney provide assistance most effectively to produce higher valuations and when important, smooth family and management transitions?
7 tips are provided below.
- “You Should Not Sell….” is a frequent first response of accountants and CPA’s when a client indicates they are thinking of selling. A better response is to ask why they are thinking about selling and then really listening. Then help them develop a plan to meet their goals.
- Business valuation for a sale is not like valuations for other purposes. It is much more about potential sales price and recent profitability.
- Potential is nice, it motivates buyers, but 95% of the time it does NOT increase price. If your client’s business has untapped potential they want to be paid for – help them obtain the potential now.
- Negotiating a sale is not like presenting testimony. Recognize and work with emotions. This is much more effective way to move prices upward than a fully rational discussion of cap rates.
- Help your client understand who their best buyer will be and what buyers want. This is profits, people, and systems. Help them develop them.
- If the buyer is a child or manager have them start conversations early. Family transactions often take five years to negotiate and five years to finance. These can be hard conversations but encourage your client to start today.
- If a market sale is in order help them hire a broker. The broker will create an auction environment and negotiate with multiple prospects while your client continues improving the business and profits right through closing.
Help your clients start early. It is never too early to start and be ready for both planned and unplanned exits.
Harvest Can Help – we provide you and your clients fast and accurate business valuations, definitions of “best buyers” and of course Outstanding Business Brokerage services.
Click to View our webinar (20 minutes) given for the National Association of Certified Valuation Analysts and download 30+ slides.
Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at email@example.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.
Your client (or you, if you are a business owner) should obtain a business valuation as part of a proper succession planning process. The business valuation combined with succession planning should result in a higher valuation and better business brokerage results. The business valuation prepared with the purpose of business value improvement should provide keys to improving operating results and reducing transfer risk both of which increase eventual profits from a business sale.
Operating results are the result of quality systems and people working to continuously and forever improve products, service and profitability. Business buyers want “working models”. They want to be able to come in and run the business the way you do and then after a period of time begin to change and grow it. Business buyer’s generally do not pay (or they do not pay much) for future growth. Therefore if your owner client wants to get paid for potential then they should develop it now. The business valuation combined with your succession planning will provide a road map for that opportunity.
Want to know more? Please click here for the downloadable e-book. “7 Things You Must Know Before You Order a Business Valuation”
Client Results from Succession Planning – Preparing for the sale:
- More money, higher price and higher values. A working model with quality products and services, long term customers, and decision makers other than the owner will greatly increase sale-ability and price. It also ensures a higher likelihood of a successful transition if you want your children to take over.
- Obtain tax savings. In many cases business assets and perhaps even corporate or partnership form can be changed to improve after tax results of the transaction. For larger businesses advanced gifting may also be worthwhile.
- Deal structures that excite buyers.
Buyers have tax and liability concerns. Like tax savings sometimes advance preparation allows you go give sellers what they want increasing your price significantly for a small cost.
- Resolve family and management issues.
Growth and opportunity often create better teams. If you intend to convey to family or management you must deal with and reasonably resolve these matters before the transaction.
- Create additional buyers. If a market sale is desired (or even an internal sale) finding out what buyers want and moving towards that if feasible will increase your buyer pool and increase buyer motivation.
- Realistically timing market.
Perfect timing is hard but our economy operates in 7 to 11 year cycles. When we get to the top of one, unless you want to stay involved for 7 to 11 more years do not wait. Have discipline and sell when the time is right.
- Create new excitement in your business.
Taking actions to really build the business will generate enthusiasm. Enthusiasm is contagious and spurs performance and devotion. This makes your business more fun to operate now and more valuable in the future.
Connect with Harvest Business Advisors today – email firstname.lastname@example.org or call 443.334.8000
Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at email@example.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.
Baron Stage Curtain & Equipment Co., Inc., a Baltimore, Maryland manufacturing company was sold to the owners of Wilhide Draperies. Harvest Business Advisors provided advisory services for the Sellers.
It is tragic when a business or anything else splits a family into pieces. Yet I see this all the time in family business succession matters.
This is particularly acute in the construction industry including specialty trades such as mechanical, HVAC, electrical and plumbing contractors because of the prevalence of family business. Exit planning between generations is difficult at best. Too often when the successor is chosen or when the stock is given or sold, the family fractures. This is not success. You can maintain peaceful Thanksgivings (maybe not all of them but most) and a successful business transition.
Time to Sell Your Construction Business? Please click here to download the e-book, “A Contractor’s Guide to Succession Planning”.
Clear communication which includes listening to everyone is essential. Continuing to communicate (listening – not just telling) after splits in family / business opinion is crucial. It takes time (a long time, usually many years) and patience to accept that things may be different from what each family member hoped. It takes determination to build a business and it takes determination to keep communicating when you do not like giving or hearing the message. Communication in family businesses often requires creating a back channel with an outside person that really wants to see the whole thing work well for everyone. This provides a vent and an opportunity for someone with no emotional claim to provide another view.
A few more quick thoughts on transferring a family business:
Fairness is a big consideration. I don’t know what fair is but I often know if a situation is unworkable or just “way” unfair. Giving a business to 5 children evenly when 2 work in the business and the rest do not is a disaster waiting to happen. This is unfair to all. Often, life insurance is used to “even” out the opportunity being given to the children “getting” the business and the other children. Again, fair at the date this family/business decision is made and fair at the date of death 20 years later may or may not work out the way one hopes, but, it is much better than a guarantee failure.
Another matter is the children who are to lead the business must be trained and groomed for the post. Not all will be able to do it.
I equate running a business to riding a bike. You can ride in a child seat on the back for years. It feels like you are riding the bike. You have been looking over the shoulders of the rider and see everything she did. But it is not the same. Only getting on the saddle and grabbing the handlebars and peddling teaches you to ride a bike.
It is tragedy when the wrong child takes over and in a few years crashes a 35 year old family business. No one wants to burden their child with that. Telling a child that does not have the capacity is hard. Killing the golden goose is even harder. It just does not seem that way at the time you need to have the “you’re not the one” conversation.
How can the family test the child? Can they let him run a division? Perhaps start up a new company to tackle a growth area? Nothing prepares or tests an owner other than being an owner. Find a way to stress test the child if at all possible.
Another reason you are going to want to start the transfer early is generally the child is going to earn the money to pay for the business from the business. If the parent has done really well there will be gifting for estate purposes but in most cases the value of the business is going to fund the parent’s retirement plan. I would not advise any business owner to walk away from control and knowledge of what is really happening until the debt or payments to them are substantially made. This means you need to start the transition well before mom and dad intend to spend 11 months of the year in Florida.
In family business succession planning starting early and carrying through with clear communication including listening and consensus building is one key to creating an exceptional exit.
Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors