Rhonda (not her real name) is considering selling the business she and her husband started in 1990. After he passed away in 1997, Rhonda assumed full control and hasn’t looked back. Well, she did remarry, but that isn’t germane to this story.
Rhonda’s financial advisor asked me to help her evaluate her options. Prior to our meeting, I asked Rhonda for several years of financial history. Although financial data alone does not provide sufficient information for a definitive market valuation, it gets me in the ballpark. Based on this cursory review, I went into the meeting thinking a reasonable starting point would be about $6 million. But I also knew that what I would learn during our meeting could change the valuation by as much as 25%, up or down.
After a tour of the facility and chit-chat about her business and family, we got down to the point of the meeting. Rhonda is 62 and seems to have a few more good work years ahead of her. However, as she told me the story of her past ten years, I could see why she was ready to harvest the crop and move on. In fact, by this point in our conversation, I was even more impressed that she had held things together so well. After about 90 minutes of discussion, I came to the belief that her business could be sold for about $7 million. But before I told her that, I asked her what number would move her. “Unless I can get $10 million, I’m just gonna let my kids run it and send me a check until I’m not around anymore.”
I have heard this logic before, many times actually. But I can only think of a handful of times when it’s worked well. I asked Rhonda the obvious question, “Are you kids ready and willing to assume that level of responsibility?” Her lack of response spoke volumes. After a few seconds pause, she said, “Maybe, I hope so, I don’t know.”
Rhonda is caught between a rock and a hard place. Rock: she has an unrealistic expectation of what her business was worth. Hard place: she has not nurtured her children to assume leadership roles that would assure the business’ long-term viability if not selling became her only option.
As we sit here today, Rhonda has a choice to sell the business for something in the neighborhood of $7 million, or plan to transition it to her children and hope they can run it well enough to generate a lifetime annuity for her. Of course, there is always a third choice. That is, kick the can down the road and deal with it later.
Rhonda is getting input from an experienced and highly regarded wealth planner. I assume she will sooner than later see the wisdom of selling today at market value. Her options of hoping the kids can figure it out or kicking the can down the road don’t create any value for anyone.
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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