Planning for Retirement
When a family business owner is planning for retirement, a profound and basic decision must be made: whether or not to pass the business on to the next generation. For some family businesses the transition period from one generation to the next is positive and productive while other family businesses experience significant problems that can wreck the business and destroy family relationships.
If the decision is made to not transition the business, then there are three primary options for the business owner: selling the business to internal parties (family members and/or employees), closing the business (liquidation), or cashing in by selling the business to an external entity through an acquisition.
According to the Atlanta-based Family Business Institute: “The average age of the family business owner who comes to us for help in planning for retirement and designing and implementing his/her exit strategy is 57 – and they plan to work for another 8-10 years before retirement. While that might be an ideal situation, one trip to the oncologist can change that time frame, significantly. Most of the time the exit strategy unfolds over a period of 1-5 years.”
And while most family business owners, as part of their retirement planning, would prefer to pass the business to the next generation, sometimes a better strategy for the business owner is to prepare the business for sale, suggests leading family business expert Don Schwerzler, Managing Director of Atlanta's Family Business Institute. By selling the business to an external 3rd party, all family members get their appropriate distribution and can do what makes sense for them, without it wrecking the business or affecting other family members. The business value can be preserved and even enhanced – but it will be distributed fairly.
If you are a business owner and you’ve ever considered planning for retirement by selling your family business, you likely recognize it’s probably the most important financial transaction of your life – and possibly for your family too. But if you’re making the decision about if and when it’s time to sell, there are some things you should think about today… they will make a significant difference in the sale price and the amount you receive, whenever the sale happens.
Planning for Retirement: What Determines the Sale Price of a Business?
If you think about the lifespan of a family business, probably the most import single transaction is the one that you make when you sell the business. When it comes to planning for retirement, obviously there are a lot of considerations as to the decision about selling and when the right time is to sell – many personal and financial considerations for family members. But there are also market considerations. Remember retail record stores? You don’t want to be a successful business in one decade and have the market disappear in the next – so the family business owner always needs to be watching the market: both for new opportunity and also when it may be the right time to get out… or put differently: go fishing when the fish are biting!
That said, if you’re planning for retirement by selling your family business, it’s smart to understand the process for valuing and selling your business, because there are things you can control and do today that will have a big impact on what gets paid for your business tomorrow.
Planning for Retirement: What is your (and your family’s) perception of your business value?
Most business owners can’t tell you what their business is worth. They can give you their financials or statistics on their customers, but it’s rare when someone knows what their business is really worth without having done the appropriate research. The fact is, you don’t really know the absolute value until someone makes an offer. That said, businesses can be valued as of today – and particularly when a business is healthy – that’s a good idea.
Planning for Retirement: Perception vs. Reality: importance of being honest with ourselves.
It’s important, especially when there is a group that will share in the distribution from a sale, to get an independent valuation of the business. This way everyone is on the same page and has a realistic expectation as to what the business is worth. While some family members may disagree with the valuation, it’s also fine to get multiple valuations since this will just be a benchmark for today. Multiple valuations will establish a range of payouts – and it’s healthy for everyone concerned to know what they are.
But establishing a benchmark is important for another reason: for any given business, there’s a high likelihood that the valuation can be increased if an appropriate plan is put in place – and the most tangible way to determine that increase is to benchmark it now.
Planning for Retirement: What you can (and can’t) change on your Valuation
Timing the Sale
The first thing you need to ask yourself in preparing for a sale is when. As the old saying goes, timing is everything – and there’s a time that’s right for the family, but there’s also a time that’s right for the market - when preparing to sell a family business, both timetables must be taken into account. So if you are planning for retirement by selling your family business, it’s usually best to establish a range of years for the sale, so there’s time for the price to be maximized. Of course other factors such as market decline and family illness may dictate a more expedited sale.
Revenue & Profits are Key – but not Everything
Of course the obvious way to grow a company’s value is to increase its Revenue and EBITDA – the more of each, the more valuable the business. But that’s not the only way to increase value and something every business owner should examine are the M&A trends in your industry? For instance, in the last decade there’s been a big push to buy private businesses by Private Equity firms as well as wealthy foreign nationals who want to gain access to U.S. citizenship for themselves and their families. Are either of these happening in your industry? If so, that’s significant to your sale.
But there are plenty of other reasons your company may be attractive for acquisition. Is there a dominant player in your market who has been acquiring companies to increase their market share? Or is your market consolidating, where the big fish are gobbling up the little fish? In these situations, revenue and EBITDA will make a big impact on the price, since this is typically the first way these acquirers value a business. But there are also other scenarios where a company or organization wants to get into your market. It may be for expansion, cost saving or strategic reasons – and you never know who will be interested until you go to market. In making your M&A plan, you need to take all these things into consideration: understanding a buyer’s motivations will become key to maximizing the sale value. Frequently revenue and profits aren’t the only or main motivator and may in fact be secondary to the value of just being in your business.
Planning for Retirement: Are there Major Problems? Are they Fixable?
There are few successful businesses that didn’t get a few nicks and scratches along the way. The big question is: Is there an environmental mission stopper in selling the company? Is there something that’s so bad about your business that would stop a sale cold? Things like toxic waste sites, ongoing or impending litigation or unaddressed tax issues come to mind. The question is, is it a deal stopper or how much will each of these issues affect the valuation? Usually problem items, material issues that will likely impact the business - are obvious… but sometimes they’re not. A good rule of thumb is: will this be perceived by an acquirer as something that could reduce either the revenue, profit or business position (e.g. something that will negatively impact the business credibility or market position, ultimately leading to a reversal to the financial position at the time of sale).
That brings it down to a business decision about fixing these problems: How does the cost of remediation compare with the impact on valuation? So doing this evaluation in conjunction with doing a valuation makes sense. In an M&A event, all skeletons almost inevitably come out – and they can be EXTREMELY costly if the buyer has to deal with them, vs. your having dealt with it already. When I say extremely, it can often cost you a multiple (2x, 3x or more) of the actual remediation cost that gets deducted in an M&A transaction – so there’s a very high value for getting things fixed prior to the sale. Of course, if you don’t have the funds to make the fix(es), you have to accept the consequences in the sale. But it puts you in a highly disadvantaged position entering the M&A process – and something you want to avoid if at all possible.
"It’s smart to understand the process for valuing and selling your business, because there are things you can control and do today that will have a big impact on what gets paid for your business tomorrow!"
Planning for Retirement: Grooming Your Company
Good Grooming is Good Business
Have you ever done research about how the market perceives your company? The answer most family business owners would give is either no or what? How your company is perceived in the market will add or subtract to any monetary valuation that gets placed on your financial performance – so investing to build your brand is a smart investment. It will pay off many times, both in the short term for building the business, but also in the long term by adding value to your M&A event when you sell.
Corporate Marketing or Branding can yield many short term benefits, including increased sales, improved customer perception, and even being offered business you may not have been considered for previously. But when you add marketing to the additional audience of the professional investor community, then it can have a multiplicative effect since these decision makers often influence their investment companies. Just imagine if you are the CEO of a company that you would savor doing business with, and you get an email about a great company in your field (yours), sent to you by your major investor – you pay attention.
So what are you doing about Marketing today? Probably some wonderful product and service marketing to maintain and grow the business. But what about the company itself? Good Corporate Marketing (separate and apart from Product/Service Marketing) is Good Grooming – it creates an impression. And in this case an important and highly valuable impression. Corporate Marketing, also called Corporate Branding, allows you to leverage the many things you are already doing like featuring members of the management team to your key constituents, talking about charitable work your firm does or leveraging all the great product/service marketing you are already doing.
It’s Never Too Soon for Good Grooming
Just take a look at some of the world’s best known brands and you can see what Great Grooming looks like: Apple, Nike, Lexus, Aflac, Walmart, Macys, Coca-Cola or P&G – each of these companies and brands spend extensively on the public image of their brand. Now you may say: I’m not Apple – but the exact same principal applies. It’s all about understanding where you want to be in the marketplace and creating a positioning and marketing to consistently reinforce that positioning. This is best done in a coordinated way in concert with existing product/service marketing efforts. But when you are branding in preparation for an M&A event, there’s a special set of audiences and messages you want to send. And if coordinated together, this can all be done under one budget.
Planning for Retirement: Who are your Key Audiences and how do they Perceive Your Company?
Most family businesses haven’t spent a lot of effort
understanding the market perception of their company. But if you believe that perceptions will help
shape the value in an M&A event, then it makes sense to take time to
recognize and define who your Key Audiences are – and which audiences matter
(and which ones don’t). This will enable
a measurement of brand recognition in each key audience and just like the valuation,
establish a benchmark for where your company is today. It will also allow you to set a goal for
where you want to go.
Planning for Retirement: Establishing and Securing an Internet Footprint
The Internet has been a transformational technology to our economy and to most businesses – in some cases upending whole industries and establishing new ones. And of course, some businesses are more Internet dependent than others. But today it’s important to have an Internet footprint that appropriately represents your company and all your products and services. Owning all the appropriate domains with corresponding professional websites is basic for building any long-term brand. It gives companies who have never heard of you before an independent and anonymous way to understand what you do – and that’s important, because one day that company just may buy you. But just like corporate branding, there are many short-term benefits too – you can see and directly measure the impact on your sales!
Planning for Retirement: Secrecy: a basic part of any Transaction
Just like the big multi-billion dollar merger transactions, confidentiality and secrecy are essential to maximizing every M&A transaction – including private companies and family businesses. It’s up to the Family Business Owner to determine who knows what and when about a pending sale for your family business. On the market side, a timetable will be established as to when the market will learn your business is available for acquisition – this is part of Developing your M&A Plan. Others involved in your business should only be told on a needs to know basis. This last point is essential to convey to any family members who will know, since many times as soon as employees hear there’s a business sale forthcoming, they immediately update and post their resume. So while telling your employees that you are planning to sell the business needs to be done – it must be done thoughtfully and in a carefully coordinated way.
From an external perspective, any and all service providers who are involved in this process must sign a Confidentiality & Non-Disclosure Agreement, binding them to confidentiality. Just like a chain, every link about information regarding a pending transaction must be solid. Confidentiality and managing the information flow are absolutely essential to having a maximized M&A transaction.
Planning for Retirement: What you can do yourself & what you should hire out
For cost reasons, many companies want to do Corporate Branding themselves with their existing marketing resources. But typically at most companies, especially in top performance companies, the marketing department is already maxed out. And even if they have some spare capacity, the corporate branding effort is often 2nd fiddle to the main product/service marketing efforts since that’s their primary job and bonuses are often based on hitting sales quotas.
An external M&A Marketing Specialist to “quarterback the process” will always get a better result for a range of reasons: singularity of focus, understanding investor audiences, understanding how M&A events happen and objectively understanding the family and business dynamics so that the process of building the Company’s brand and preparing for the M&A will work to enhance the business vs. damage it in any way. Our experienced family business M&A Marketing Specialist can provide guidance to prepare for and get through this transaction with all the key considerations of value maximization, confidentiality, what/when to tell family members and employees, etc. The more experienced your Marketing Specialist is with M&A, the better the final result.
Timing: if you plan to sell in the next 10 years, start this now (it’s never too soon…)
While planning for retirement can be tricky in general, it’s much more complicated when it’s a family business and there’s a family involved. So if your family is thinking about cashing out and selling your family business in the next decade, it’s a good idea to do 3 things:
• Get an independent Valuation today; share that info with the family.
• Start addressing any Deal Stopper issues; make sure the family understands why.
• Start Grooming the Brand; look at what an M&A Marketing Specialist can do for enhancing your value and seriously consider engaging them. They will help you make a Corporate Marketing Plan to last up to and through your M&A event.
Planning for Retirement: Next Steps: Talk to the Professionals
If you are starting to plan for the sale of your family business, the best next step is to talk to professionals who understand all the issues involved: Marketing, M&A and Family Business issues. Consider a web meeting or making a trip to Atlanta for a face-to-face evaluation to discuss the process and timetable - a small investment today can yield an immense payback tomorrow.
The Family Business Institute has been advising family business entrepreneurs on succession and other family business issues for more than 40 years and its Managing Director and Founder Don Schwerzler, continues to be active in advising families today. The Family Business Institute is a veteran- owned company headquartered in Atlanta, Georgia.
If you are a family business owner planning for retirement and have a question about selling your family business, use the ASK THE FAMILY BUSINESS Marketing EXPERT form to arrange for a free and confidential conversation with our family business M&A expert:
Director of M&A Marketing
If you have a question about selling your family business, use the ASK THE FAMILY BUSINESS MARKETING EXPERT form to arrange a free and confidential conversation with our family business M&A expert.
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