Planning an Exit Strategy: A How-To Guide for Baby Boomers

There’s a lot of talk these days about the huge transfer of wealth that’s going to occur over the next 10-15 years as baby boomer business owners decide to take retirement.

The SBA says there are 12 million businesses in America owned by baby boomers.  Business brokers, accounting firms and financial planners love to talk about this coming “tsunami”, the theory being as these 12 million owners sell their businesses, there’s going to be a huge transfer of wealth with resulting consulting/management/brokerage opportunities. But based on my experience and studied opinion, this tsunami is more likely to be a tiny ripple because most of these 12 million businesses will not sell.  Many will simply close and go away because they are not sale-able.

Before you write me off as a pessimist, let me explain my market-tested reasoning, because if you have two to three years left before you want to sell your business, there are specific things you can do to improve your chances of selling.

# 1 Understand your market value.  Almost all small businesses go to market overpriced because: 1) an unethical or inexperienced business broker gives the owner an inflated expectation just to get the engagement; 2) the owner has decided what he/she needs to fund their retirement (which might be totally unrelated to the market value of their business); and/or 3) the owner is emotionally attached to his business and simply believes it is worth more than it really is.

#2 Make the business sustainable without you.  Many of the baby boomer-owned businesses I see are simply a reflection of the owner, meaning the owner IS the business and when he/she leaves, the business falls apart. This is especially true with professional services such as law, accounting, a medical practices.

#3 of a small business is first looking to have his/her salary needs met.  They are, so to speak, buying a job.  For example, if a buyer is leaving a corporate job because he wants to be an entrepreneur, the first thing he will look for is a business that has a cash flow to supports his salary expectation.

#4 Be prepared to finance some of the purchase.  Many of the small business transactions I see simply are not bankable, meaning the buyer cannot get a bank loan. There are many reasons this can be the case, the most prevalent seem to be lack of reliable financial records, insufficient assets that can be attached, or unpredictability in the business’ cash flow.

#5  Be proactive in due diligence.  Even if a business is priced right, is sustainable after the owner leaves, supports a buyer’s salary needs, and passes muster with a bank, many deals fall apart when doubt enters during the due diligence phase. Doubt is the cancer of due diligence, once it’s there, it’s hard to get rid of. Doubt comes in many forms, it might be something on financial statement that isn’t properly coded, it might be concern about customer concentration, or it might be the errant comment of an employee or key customer.  Sometimes you can forecast this doubt before it happens so be proactive to identify it in advance and have strategies to address it. But if you hear doubt from the buyer and/or his advisor in the course of due diligence, you must be quick to respond because, like cancer, doubt that festers can cause the train to come off the track.

If you are considering selling your Tennessee-based business, give me a call or drop me an email and we can talk through how your business might handle one or more of these issues. The buyers are out there, you just need to have the experienced and honest advisors who know how to approach them and how to communicate with them.

I was reminded this week why business brokers have a bad reputation. I am working on behalf of a successful manufacturing company in the Nashville area that is interested in growth through acquisition. The company retained me several months ago to develop their acquisition strategy, identify possible candidates for acquisition, then work through the process to get a transaction, or two, completed before the end of the year.  Earlier this week I identified a company north of Nashville that looked to be a possible fit for my client, so I contacted the selling company’s business broker, who works for a well-known commercial firm.

Oddly enough, the first thing this business broker told me was he did not cooperate with other business brokers.  When I hear that, I assume the broker is more fixated on his fee than getting a deal done.   After all, here I am calling on behalf of a company with money that wants to make an acquisition, and because he might have to share his fee, the selling company’s broker won’t talk to me? In a word, dumb.  No, make that two words, dumb and selfish ….. as I see it, the seller’s broker was putting his interest ahead of his client.  No true professional would ever do that, ever.

I told the seller’s broker that my client would pay my fee, which then made him comfortable he’d make his full fee.  So, he sent me an NDA, which I immediately signed and returned, at which point he sent me the “offering memorandum” on his client company.  This memorandum looked like something done for an 8th grade Junior Achievement project (not to insult Junior Achievement, of which I am a big fan). The “marketing package” had a few hundred words essentially repeating what was on the selling company’s website.  But the presentation style was even more elementary….. it was typed in all caps. There were two or three pages of exhibits, which were just copies of basic financial statements, and those weren’t even properly aligned on the page. The entire package was amateurish, sloppy, and made the client company look like a total loser.

I couldn’t help but wonder what this broker had done, or said, to convince the selling company that he was the right guy to represent them.

My lesson for the week: there are lazy, incompetent, and unprofessional business brokers out there. Before you retain someone to represent your business for sale, ask them to show you two or three offering memorandums they have prepared for other companies.   And make sure they agree to cooperate with other business brokers.

But, here’s the saddest part of this story. This example is not unusual. Since there are no qualifications or licensees required to call yourself a business broker in the state of Tennessee, any Jackleg looking for a fee can say they’ll help you sell your business.  Therefore, you have to work harder to make sure your business broker is competent and hard working.  Before you list your business for sale, interview two or other brokers, ask the hard questions, and be discriminating in the quality of answers you expect.

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Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

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