BY STEPHEN L. FERRARO
With 2015 in full swing, some businesses
may need to begin to think about planning a
business exit.
Listed are 10 reasons why one should
think about planning it now, whether the
actual event will happen this year or in the
next 10 years.
1. The timing is right to begin planning
today.
In real estate, the saying is “location,
location, location.” With business exits, it is
“timing, timing, timing.” Just as timing was
important as you built your business, it is
critically important during your exit. If we
look at the following transfer timing chart, it
indicates that we are likely in the ‘prime selling
time’ and should be for a few more years.
Since it takes time to properly plan and execute
an exit, the advice is to act now, rather
than head into the next recession with a
majority of your wealth tied to your business.
2. Avoid owning your business during the
next recession.
The leading baby boomer owners are turning
69 years old in 2015. Since many privately
held businesses are owned by boomers, a
question that needs to be asked is how many
more recessions do you want to go through?
Most owners agree that the last recession
was a painful reminder of the risk that exists
in a privately-held business. They also do not
want to go through another one, particularly
if they are in their 70s. Unfortunately, we do
not know the timing of the next recession
but you can control your own actions and
your ability to take action with your planning
today.
3. A new congress brings uncertainty and
possibly new changes.
On Nov. 2, 2014, the Republican Party took
over as the majority in the U.S. Senate (and
reinforced their majority in the U.S. House
of Representatives). While the assumptions
generally are that Republicans will promote
pro-growth initiatives for small businesses,
we really don’t know what form of compromised
changes will come about.
For example, the tax code is re-written
approximately every 25 years or so and it
seems over-due for a re-write. A new Congress
could bring new changes and those changes may or may not benefit your future plans for
a business transition.
4. Your business likely showed improved
performance in 2014, a trend toward a higher
value.
The future owner of your business will ultimately
care about two financial components
related to your company’s performance: the
future cash flows and the [perceived] risk
of receiving those cash flows into the future.
Therefore, each additional year that you
can show a trend towards improved performance
is one more arrow in your quiver to
argue for, and defend, a higher value for your
business. This is particularly important if you
need that additional value to meet your personal,
financial goals. You may be like many
owners who have seen profitability restored
for many years now and it may just be time
to cash in while the value is high.
5. Interest rates are still very low.
In today’s financial environment, interest
rates remain low, making money cheap to
borrow. Therefore, buyers can still borrow
at a historically low rate, which makes it
more attractive to execute transactions. And,
similar to home prices, when money is cheap,
values tend to rise. You may find that your
exit value in a low interest rate environment
is higher than in an environment where interest
rates are rising.
6. Capital is available for acquisitions.
According to online data-base PEI Services,
there are currently over 2,400 private equity
groups that own nearly 57,000 privately-held
companies. The basic formula for many of these
private equity groups is to buy a ‘platform’ business
and buy additional companies as a growth
plan. With hundreds of billions of dollars in
available capital for acquisitions and a business
model of growth through acquisition, there is
a high demand for privately-held businesses.
7. A relatively low supply of companies to
purchase.
There is an imbalance between the high
demand from buyers for companies and the
low supply of quality businesses available for
acquisition. When an imbalance in the marketplace
exists, you can take advantage of it if
you understand the dynamics.
If you have the right type of business, revenues,
management team and growth trend;
then it is possible that there will be a line of
buyers bidding up the price of your business.
If you desire to cash in your business, you owe
it to yourself to learn more about this marketplace
dynamic.
8. The supply -demand imbalance is not
likely to last.
With so many baby boomer owners marching
towards retirement, it is likely that more
and more companies will come on the market
for sale over the next few years. Therefore, to
take advantage of this current imbalance, you
may need to stay ahead of this pending wave
of sellers and offer your business to the market
before others.
9. Tools and resources have never been
greater.
Exiting a business is a complex process. To
fill the needs of exiting owners, the ‘exit planning’
industry is growing at a dynamic rate.
An exit planner is a new breed of consultant
who is adapting and building their business
model around servicing this particular need to coordinate various planning issues, including:
taxes that you may owe for different transfers;
legal agreements that you may need to sign;
capital that you may need to attract; cash flow
projections that you may need to provide to
successor owners; insurances that you may
need to purchase to protect your wealth; estate
tax planning protections; reinvestment of the
exit proceeds.
More and more owners are seeing that their
advisors now have access to tools and support
to assist them with this critical planning area.
Ask your advisors about how they are aligned
to assist you in this area. You are likely to see
that these valuable consultants now have the
vision, creativity and tools to help you arrive at
your desired destination.
10. You may simply be tired.
This is a fine time for reflection. Go back to
the beginning of your business. Ask the important
question, “why did I get into business to
begin with?” The answer, if you are like most
owners, is something like “to control my own
destiny.” The question today is, “do you really
feel in control of your destiny?'”
The answer is likely “no,” as you have
committed most of your financial and time
resources to your business, feeling anything but
empowered and free. Although the business
has provided for you for many years, it may be
time to plan for the ultimate transaction, the
liberation of your time and resources from the
business and a personal transition into activities
that are stimulating and satisfying outside
of your privately-held company.
There are an infinite amount of reasons to
be proactive in protecting your most valuable
asset, your privately-held business. The ones
listed in this article hopefully have moved you
towards further seeing that you need to take
the first steps in planning your exit. Why not
resolve to do it this year?
Ferraro is a CPA and partner with SaxBST
LLP.
Photo Courtesy SaxBST LLP