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Balancing Risk and Reward

I met Wayne (not his real name) through an introduction from his financial planner. Wayne owns a successful business in Mississippi that he had taken over after his dad’s death nine years ago. Long hours and employee management issues were taking a toll on him and resultantly, his family. In early 2020, he promised his wife he’d consider selling his business.

Wayne started the process by asking his Memphis-based financial planner how much he could expect to return from the investment of the sale proceeds. Like most capable financial planners, Wayne’s advisor told him he could invest the after-tax sale proceeds and conservatively generate an after-tax annual return of 3.75%. Given a good estimate of his business value, Wayne was looking at an annual return of about $250,000.

Based on that information, Wayne retained me to handle the sale of his business. While Covid-travel restrictions made our task a bit more difficult, we identified an Ohio-based company interested in acquiring Wayne’s business. Given the pre-planning he had done with his financial planner, Wayne knew exactly what he needed to get from the sale. That benchmark was within the valuation expectation I had given him when we started. The Ohio company offered us 5% more than our benchmark, at which point we started due diligence with the intention of completing the sale by the end of the year.

About 30 days from having the deal ready to be signed, Wayne got cold feet. It seems he suddenly realized he could not live on $250,000 a year. That’s what happens when you treat your business like a piggy bank. Wayne has, shall we say, a very nice lifestyle, the result of several years when his annual income was greater than $1 million. Even though his financial planner had raised the reality that he’d have to scale back to live on “just” $250,000 a year, Wayne didn’t seem to fully appreciate that reality until he got closer to that reality. That’s when he backed out of the deal.

Wayne’s financial planner did everything right. She asked the right questions and rendered the right analysis. But like many business owners, Wayne’s decision to not sell was fraught with loads of emotion and uncertainty about the future. The financial planner called me once this was all over, she felt terrible. “I brought you into this deal, you spent hundreds of hours to no avail.” But I assured her, it wasn’t her fault, she had done everything right.

I explained to Wayne’s financial planner that Wayne’s situation is not unusual. When a business owner lives off most of the business’ profit, he will have a difficult post-closing lifestyle adjustment. The business owner sees the reward of selling, but that doesn’t mitigate the risk of not having the business to support his lifestyle.  So, the business owner will hold onto the business until external circumstances force a sale. Any guess as to how that plan usually works out?

 

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the story, names and fact patterns are changed to preserve the parties’ identities.

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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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