As reported by Idaho Business Review (IBR) in September 2019, Idaho’s businesses that fail to plan, plan to fail. That article, reported slightly before the COVID-19 pandemic, noted a total of 15,000 businesses in Idaho, also noting that two out of three put up for sale don’t sell.
Overall, privately held businesses in the United States have been dramatically impacted by the pandemic, resulting in a giant acceleration of exits in 2020 and 2021 beyond historical norms, according to federal surveys. There has also been an acceleration of successful merger and acquisition activity since 2021.
For owners contemplating an exit soon, it is heartening to note the current economy is growing more than 6% per year, interest rates are at or near historical lows and cash on balance sheets has seldom been higher. This creates an exciting and enormous opportunity for business owners to exit their business in the way they want and at a very attractive price before capital gain tax rates increase.
What actions should business owners take now?
Particularly if you plan to transition your company within the next 10-15 years, now is the time to give serious thought to specific exit planning goals and objectives. As is the case in many industries, you should set SMART (Specific, Measurable, Achievable, Relevant and Timely) goals. This will be the key to a well-thought-out blueprint of executable steps that will put the odds of success in your favor. There are four principal objectives common to most business owners:
- Leaving the business on their timetable
- Leaving the business financially stable
- Securing the careers of those who have contributed to the success of the company
- Transferring the business to whom they desire
Shockingly, according to recent research from PwC, 53% of U.S. owners have given little to no attention to their exit plans; 88% have no written plan and 70% do not know how much post retirement income they need. Research shows the vast majority of the 4.5 million U.S. firms that will change ownership soon are tragically unprepared and lack the knowledge they need (called Exit IQ here).
Increase your Exit IQ of available strategies
For Idaho business owners, the message is clear: It is time to increase your Exit IQ.
Exit strategies vary. They might include selling a business to an outside party, the merger of two businesses in the same industry, an internal transfer from one family member to another or, as noted in IBR’s prior article, an Employee Stock Ownership Plan. It is also important that owners understand these strategies within the framework of your business culture, industry and structure. It is even possible to combine strategies to achieve specific objectives or to create flexibility of execution. But it takes time, commitment and thought to analyze these and other strategies and to design the ultimate exit strategy for you.
Do intense due diligence
Choosing the right investment banking firm will be vital and can mean the difference between a positive experience or a nightmare. Selling a company to an outside party can take six to 18 months. This, of course, is an eternity in a poor investment banker relationship! Ideally, the firm can create a controlled auction of a field of prospective buyers, which increases seller leverage, a major factor in getting an optimum price. Without a professional team, fewer than 30% of U.S. businesses for sale will close at all, and of those, most completed deals are going 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 approaches 90%.
Don’t forget to make contingency plans
As with any business process, you must create a contingency plan for the unexpected. An annual review of the company documents that address business risks, insurance, legal issues, etc. is critical. The most important is the company buy-sell agreement that addresses all the triggering events that impact the transfer of ownership, properly funded with key person life and disability insurance, can protect the financial security of the business during and after the exit.
Establish a realistic value for the business
You must support the business value with sound financial principals. An unrealistic value of the business is a major factor in exit failures. The pandemic may also cause buyers and sellers to reassess valuation methodologies to account for interim disruptions, supply chain delays or the inability to hire experienced talent, all of which can impact profitability. The pandemic has heightened the business risk and increases doubts on whether historic financial information is an accurate predictor of the value of the business.
The sad truth is that owners who are already unprepared for their eventual exits are far more prone to be harmed by sudden or unexpected turns in the nation’s economy. Without a well-executed exit plan, owners are prone to be forced to sell or liquidate in a moment of need as opposed to marketing the business at an ideal time and from a position of strength.
Increasing Exit IQ and having a full understanding of the planning strategies and opportunities can make a vital difference in every owner’s financial security and future success of the company. Recent studies show that privately held business owners have up to 90% of their net worth invested in their business. Let’s pause on that note for a minute. If you currently own a business in Idaho or the surrounding regions, there is a high probability this is you. How prepared are you for the largest 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.