Edition 396 – What’s Your Exit

I recently had occasion to spend time with around 40 small and family business owners attending a conference in Fiji.  As a guest speaker at the event, one of my tasks was to facilitate some short information sessions, talking with business owners about whatever happened to be on their mind.

There were two overwhelming themes that came through these one-on-one discussions. One of those was about exiting their business at some future point in time.

What struck me about these conversations, was:

1. Most business owners seriously underestimate the time frame to sell a business, or to transition it to the next generation. In my opinion, it’s a minimum of 5 years and, preferably, up to 10 years, between now and the exit date.
2. Almost no one is networking with others in their industry, with a view to seeing them as potential collaborators, or purchasers.
3. Systems and processes are evident in some, but not all businesses. If I’m buying your business, I want to know the recipe for how to make it work, generate a profit and pay back the loan.
4. Greater than 90% of people have an elevated sense as to the value of their business. When you explain to someone how a business is valued, some nod, then still stick to their number, even though you can prove it is well overpriced. Remember, if you want $1 million for your house, and I’m the only buyer in the market at $900K, the market price is probably, $900K.
5. Exit is an external process. Succession is an internal process.
6. Choosing a member of the second generation to take over your business will only work if they have the right technical skills, the right personality and the management expertise to run the business. If any of those are missing, it won’t work.
7. On more than one occasion, owners are assuming the second generation will take over the business, without actually asking that second generation if that’s what they want to do with their lives.
8. A large proportion of the businesses rely on the technical and time input of the owners – in other words, they’re “doing the do”. For a prospective purchaser, that’s not a business – it’s a job.
9. Business owners think that in the years up to the sale, they’ll close their wallets in terms of making ongoing investment in the business. No one wants to buy a second hand car that’s not been serviced. No one wants to buy a house that requires work (unless you’re happy to renovate). The same applies to businesses – a purchaser wants it to be in tip-top shape at the time of purchase, to maximise their chance of success.

It’s interesting to observe the body language of business owners when you make some of these points known to them. For some, there’s a resigned acceptance of what you’re saying. For others, there’s a sense of “I’m hearing you, but I’m not listening”. For a third group, there’s a genuine display of them taking note of not only what you’re saying, but what they need to do to make their exit, possible.

For the first two groups, chances are they’ll either never sell, or they’ll sell at a substantially reduced price.

For the last group, there’s the opportunity to build towards an end goal and generate a sale price of at least the amount they’re looking for. These are the business owners who have quickly realised that to make it work, they need to step out of the role of the Technician, and permanently base themselves in the Entrepreneur space.

If you’re looking to exit one day, where do you sit?

This Week’s Tip

Why up to 10 years? Your first choice of a potential successor, may not work out, meaning the process of finding a Version 2.0 successor needs to start all over again.