By Michael Torney, J.D., CFP®, LL.M., CEPA
Business owners are not usually focused on selling their company. They are focused on running the business. This makes sense – why worry about selling the company when that’s years away? Let’s say this business owner is 50 years old and is thinking about exiting at age 65. 15 years is long enough to put off the idea of selling, right? There are a variety of reasons why timing our exit perfectly can be a challenge.
Health Factors: As we age, our health changes. You may know someone who was forced into an early retirement or passed away pre-maturely. When you are in your 20s, the odds of those things happening are low. But as we age those odds typically increase. If a health event occurs, and your business is not ready to sell, there can be a significant decrease in the sale price (that’s the best-case scenario).
Divorce: Unfortunately, divorce happens to many couples. Most of them did not know the divorce was imminent until papers have been served. Without proper planning, the business is substantially impacted. Retirement plans often have to be pushed back.
Market Factors: every business trades in a range of multiples. There are periods of time when certain industries trade at higher ranges than history. If you are set on age 65, you subject yourself to selling at whatever the prevailing range of multiples is on that particular year.
Disagreement: When multiple owners exist, there often can be conflict. Sometimes that conflict can result in differing opinions on strategy, growth objectives, timelines for exiting, etc. If the disagreements are coupled with an unexpected health event, divorce, lawsuit, etc. it can be particularly problematic by putting financial stress on the business.
Company Risk: Large clients sometimes leave. Superstar employees may join a competitor. Unexpected lawsuits are filed. As technology changes, certain products or services that consist of a large source of revenue may dwindle and force a change in direction for new revenue sources.
You cannot control these risks. They just happen. Most times, it’s sudden. That is why it could be beneficial to run your business as if it’s for sale. Running your business this way increases its present value (and often your EBITDA). It also allows more exit paths to present themselves rather than limiting yourself to one or two paths (which also increases negotiating power and hence price). When risks materialize in your life or business, you are better equipped to deal with them. Running your business this way grows value and expands options so that you can transition your business on your terms when you are ready.
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