With the Covid-19 pandemic ongoing and no determined end in sight, it’s made sense to many to consider the possibility of moving on from business ownership. The stresses of operating under changing conditions may lead some to simply seek an end to the madness.
Exit planning was the theme for CSU Bakersfield’s Small Business Development Center’s (SBDC) weekly educational webinar on Wednesday, October 6.
The webinar series was started to help business owners navigate the Covid-19 pandemic and has evolved into a weekly thing. a
On Wednesday, SBDC director Kelly Bearden was joined by Michael Balstad, an exit-planning advisor, for a presentation on exit strategies and planning for life after the sale.
Balstad is founder of Harvest Transitional Services, a small firm specializing in setting up strategies for business owners looking to sell their business and move on.
According to Balstad, the simple desire to sell your business probably won’t cut it; 80% of businesses listed for sale, he said, do not end in a positive transaction. Nearly half of those who are able to sell have to make concessions on the price and/or terms of the deal.
70% of family businesses do not make it beyond the founding owner (Lunch: Shit!).
The reason for low odds of success in selling, Balstad explained, “is precisely because [the businesses] are not ‘leavable.’” Oftentimes, the owner IS the business or does pretty much everything needed to keep it running and making money. If something were to happen to that one person, “the business could not survive without them,” Balstad said.
“You’ve already done the heavy lifting,” he said to business owners, “Acquiring a successful business is a much lower-risk way to get into business than starting one from scratch.”
Balstad cited a lack of communication as a key cause of failure when planning for the future of a business; that issue stems from procrastination about planning farther into the future.
“None of us want to think about our mortality,” Balstad explained, adding that many small business owners are so invested in their work that it becomes their identity. As a result, separating the owner from the business can make for a difficult mental process.
50% of business owners in the US are over the age of 50, accounting for roughly 12 million businesses.
Without an exit plan, or strategy, looking towards the future, the continued success of a business can be put into jeopardy very easily; a sudden illness, accident, or change in fortunes can throw a major wrench into the machine of a small business.
“Everybody is going to leave this world and their business,” Balstad said, “whether by design or by default.”
With the Covid-19 pandemic, Balstad said that he’d heard from a large number of business owners looking to sell sooner rather than later. The problem with an immediate departure is pretty simple: there’s a lot that needs to be sorted out on both the business and owner’s ends before that can happen.
First things: understanding the value of the business is essential, not only for the profit of the sale, but for the tax repercussions of the sale.
Balstad gave a rundown of the current national business situation for the second quarter of 2021: The median price of a business is $320,000, which is up 19% over Q2 2019.
The number of businesses sold in Q2 2021 is up 38% compared to Q2 2020 and down 16% compared to Q2 2019.
In short, fewer businesses sold, but those that did sold for higher prices. The lesson there, according to Balstad, is that people fly to quality. That drive, he theorized, may be due to the stressors of the Covid-19 economy. A well-run business that weathers the storm is more desirable for a buyer.
81% of businesses sold during Q2 2021 went for less than one million dollars, and 46% of those buying businesses were from the same county as the business in question. 32% of buyers came from outside of the county and 22% were from outside of the state.
Balstad said that survey results indicated 75% of those who sold businesses “profoundly regretted it” within months, demonstrating that many did not have the successful exit that they desired.
1 in 5 business owners, he said, have created a written future plan and 1 in 5 owners have a successful exit from their business.
Balstad emphasized financial readiness as key to selling. Owners need to figure out what resources they will need post-sale and how to generate those resources if they are not available. If more capital is needed to create the retirement you want, Balstad advised creating a business plan that will allow you to get there by the time you’re ready to leave.
He also pointed to business attractiveness as essential in creating a successful sale. Buyers, he said, are buying a single thing: future potential earnings. Anything that can be done to increase that potential makes a business that much more desirable.
With that in mind, Balstad laid out four steps in the process of a sale:
1. Develop a personal vision of exiting the business. Personal priorities will inform the appropriate exit strategy
2. Develop value creation and growth strategies
3. Employ the best tax, wealth, and risk planning possible to ensure the sale process goes smoothly despite any issues that may occur
4. Consider what life looks after selling a business and if you are personally prepared to go through with the process.
Balstad’s company provides an assessment for business owners to evaluate their current operations and pinpoint where positive change can be enacted.
The degree that you can close gaps in your business decreases potential risks in those areas which in turn increases the value for anyone interested in buying.
The difference in value, he said, can be up 400% depending upon the effectiveness of those changes. For example, a $400,000 business that resolves its shortcomings and presents the best case possible to a seller can sell for up to $1,600,000.
“Exit planning,” Balstead said,“is just good business strategy … it’s starting with the end in mind.” Any negative potential outcome, he added, will far outweigh the fear of addressing one’s own mortality. If a business could still run the same without the owner present and/or able to answer questions about operations, then the contingency planning done in the past is already paying dividends. If that same business would fall apart, owners need to do the work to their business to a self-sufficient point.
93% of business owners surveyed by Harvest do not have formal life after business plan, and 40% have no plans to cover illness, death or a forced exit, Balstad explained.
He also encouraged a professional, independent valuation as opposed to one undertaken by the owner. The standard deviation (amount above or below the actual value) for self-evaluations is 60%. Operating off those results can result in losing money or being unable to sell due to a high price.
Boiled down to a few succinct points:
– A plan for the inevitable exit from business life is a must if there’s to be any success after the sale.
-Owners need to understand the value of a business and how to enhance parts of the business to increase that value will reward those willing to take the time.
-Acceptance of bad potential outcomes is a must; contingency plans are essential to ensure continued success.
-Figure out goals and desired timelines in advance and commit to sticking by them.
In short: plan ahead, plan for every possible outcome, and make sure to be prepared when the time to sell comes.