As reported by Idaho Business Review (IBR) in September 2019, Idaho businesses that don’t plan, plan to fail. This article, published shortly before the COVID-19 pandemic, noted a total of 15,000 businesses in Idaho, also noting that two out of three listed are not selling.
Overall, private businesses in the United States have been significantly affected by the pandemic, leading to a giant acceleration of releases in 2020 and 2021 beyond historical standards, according to federal surveys. There has also been an acceleration in successful mergers and acquisitions since 2021.
For homeowners who are considering an upcoming exit, it’s comforting that the current economy is growing by over 6% per year, interest rates are at or near all-time low levels, and liquidity on the balance sheet have rarely been higher. This creates an exciting and huge opportunity for business owners to exit their business the way they want and at a very attractive price before capital gains tax rates rise.
What Actions Should Business Owners Take Now?
Particularly if you are planning to transition your business over the next 10 to 15 years, now is the time to give some serious thought to the specific goals and objectives of exit planning. As is the case in many industries, you need to set SMART goals (Specific, Measurable, Achievable, Relevant and Time-bound). This will be the key to a well thought out plan of executable steps that will put the odds in your favor for success. There are four main goals common to most business owners:
- Leaving the company on their schedule
- Leaving the financially stable company
- Securing the careers of those who have contributed to the success of the company
- Transfer the business to whomever they want
Surprisingly, according to a recent PwC study, 53% of US homeowners paid little or no attention to their exit plans; 88% don’t have a written plan and 70% don’t know how much post-retirement income they need. Research shows that the vast majority of the 4.5 million American businesses that will soon change owners are tragically ill-prepared and lack the knowledge they need (referred to here as Exit IQ).
Increase your exit IQ from the strategies available
For Idaho business owners, the message is clear: it’s time to increase your output IQ.
Exit strategies vary. They can include the sale of a business to a third party, the merger of two businesses in the same industry, an internal transfer from one family member to another or, as noted in the previous IBR article, a plan employee shareholding. It’s also important that owners understand these strategies as part of your business culture, industry, and structure. It is even possible to combine strategies to achieve specific goals or to create execution flexibility. But it takes time, commitment, and thought to analyze these and other strategies and design the ultimate exit strategy for you.
Exercise intense due diligence
Choosing the right investment bank will be vital and can mean the difference between a positive experience and a nightmare. Selling a business to a third party can take six to 18 months. This, of course, is an eternity in a bad relationship with an investment banker! Ideally, the business can create a controlled auction of a field of potential buyers, which increases seller leverage, a major factor in obtaining an optimal price. Without a professional team, less than 30% of US businesses for sale will close, and of those, most deals will go to the first suitor, on the buyer’s terms, leaving millions of dollars on the table. But by implementing a comprehensive exit process designed to uncover the ultimate exit plan for your business, your success rate is approaching 90%.
Don’t forget to make contingency plans
As with any business process, you need to create a contingency plan for the unexpected. An annual review of company documents that deal with business risks, insurance, legal matters, etc. is essential. The most important is the buy-sell agreement of the company which deals with all the trigger events that affect the transfer of ownership, properly funded with life and disability insurance for key persons, can protect security financial support during and after the exit.
Establish a realistic value for the company
You need to support business value with sound financial principles. An unrealistic company value is a major factor in exit failures. The pandemic can also cause buyers and sellers to re-evaluate valuation methodologies to account for intermediate disruptions, supply chain delays, or the inability to hire experienced talent, all of which can have an impact. on profitability. The pandemic has increased business risk and increased doubts about whether historical financial information is an accurate predictor of business value.
The sad truth is that homeowners who are already unprepared for their eventual exit are much more likely to be harmed by sudden or unexpected turns in the national economy. Without a well-executed exit plan, owners are likely to be forced to sell or liquidate when needed, as opposed to marketing the business at an ideal time and in a position of strength.
Increasing exit IQ and having a full understanding of planning strategies and opportunities can make a vital difference in the financial security of every owner and the future success of the business. Recent studies show that private business owners have up to 90% of their net worth invested in their business. Let us dwell on that note for a minute. If you currently own a business in Idaho or the surrounding areas, chances are it’s you. How prepared are you for the biggest and most important financial decision of your life? Now is the time to prepare.
– Richard Tanner and Cory Tanner are co-owners of Exit IQ LLC in Salt Lake City.