Part 2 - Debunking the Myths Around Exit Strategies
This is part two of a short series on why every business owner should take the time to develop a solid exit strategy. These lessons can also be found in my book - Maximize Business Value - Begin with the Exit in Mind - available on our website or on Amazon.
Last week, we talked about the fact that Exit planning can seem like a useless process until the business owner decides it’s time to exit the business. After all, why in the world would a business owner want to put himself through that effort before it’s really needed?
Let me tick off a few reasons…
This week - let’s turn our attention to some of the common myths about business exits - and let’s debunk some of those common assumptions.
Just like last week, this is not an exhaustive list, just some of the high spots. When I ask business owners to tell me about their exit strategy, here are some of the more common answers I get…
I’m not ready now. My business will sell quickly. I’ll call someone when I’m ready to sell.
I already know what buyers want.
I get calls from potential buyers all the time.
There’s just too much to do to get this business where I want it to be. I’ll start thinking about exiting in three to five years.
So let’s break these down.
The “I’m Not Ready Now” Response
I’m not ready, or my business is just not ready now. But I’m confident it will sell quickly, so I’ll call someone when I’m ready to sell.
The unspoken issue with this approach is that if the business owner starts to plan when they’ve decided it’s time to exit the business, they probably waited too long and the business is not properly prepared for transition. The simple fact is that 83% of all attempted transitions fail to reach a closing. The odds of landing in that 83 percent category increase exponentially without a plan. At the very least, the business owner will likely have to accept an offer far less than what they want or get stuck with a deal that is less than desirable. Preparing with less than two years before the planned exit event, there is very little the business owner can do to change the outcome. It is what it already is.
Truth be told, this approach is way more common than it should be. And, of course, the problem with this approach is that for most business owners, this is a once in a lifetime event - and they probably don’t know what they don’t know.
I recognize that some businesses have little time to prepare, usually for unforeseen circumstances. Frankly, if you have less than two years, you should focus on non-strategic issues and de-risking. While these activities typically add little short-term value, they are at least steps in the right direction and may help you position the business for a transition.
As far as selling quickly goes, there is precious little data on business transactions, but the average takes about a year. Some take much longer. Even if everything is buttoned up perfectly, buyer due diligence can drag on for months prolonging the process and increasing the likelihood of the deal falling apart or the value lowering.
The “I Know What Buyers Want” Response
Every buyer of every business has a different motivation. Some are looking for earnings, others are looking for recurring revenue, and still others are looking for market share or expanded markets or some special technology or innovation. The truth is, no one really knows what a prospective buyer might be looking to purchase.
A well designed exit process will turn up prospective buyers that were probably never considered. Certainly, some exits are designed for one buyer, but most buyers are yet to be found.
Therefore, how can a business owner know what a buyer wants before they know who the buyer might be? That’s not to mean that it’s not a good idea to know what buyers might be interested in. On the contrary, a well designed exit strategy will have clear targets in mind, but a seller should be open to the possibilities they can’t even imagine now.
The “The Buyers are Calling…” Response
“People call me all the time.” Here’s a dirty little secret. They are calling everyone! They’re prospecting! Let’s just work the math.
If you’re a lower middle market company (for the sake of argument, let’s define Lower Middle Market like Exit Planning Institute defines it: $5 to $100 million annual revenue) then you are being stalked by every private equity (PE) firm on the planet. These PE firms have so much “dry powder” or committed capital that they have to invest. Every one of them will tell you that they have been following your impressive story, and that they have serious interest in your market.
Let me be clear, this is not an indictment of PE firms. On the contrary, I think they play an essential role in the exit planning process. They are all just chasing the same targets.
According to Pitchbook, a leading research organization focused on alternative investment sources, there are about 3,500 PE firms globally. For the sake of argument, let’s conservatively assume they have two or three analysts on staff. Think of these analysts as business development representatives. Most are required to make a hundred calls a day, but let’s just say they actually make fifty. So, 3,500 firms x 2.5 analysts x 50 calls = 437,500 calls per day.
There are 6.03 million businesses with revenue under $100 million in America that employ people. Calling all of these businesses with the call volume listed above would take less than fourteen days. So, the law of averages tells us that you should get at least one call every fourteen days... just like everyone else.
And, by the way, your chances of being stalked by these buyers dramatically improve when you win awards or get on some published list. In my last business, we were on the Inc. 5000 list (fastest growing companies in the United States) four times, and the Fast Tech List (fastest growing tech companies in our region) six times. I was also a finalist for the EY Entrepreneur of the Year award, in addition to numerous other corporate and industry awards. Each time we “made the list,” the phone rang off the hook. These callers had been following us for years and wanted us to know that they were very interested in our space.
Finally - there the “I Have Too Much to Prepare. Call me in Three Years”
I talk to many owners who realize that there’s just too much to do to get their business where they want it to be to exit. They believe they will spend time working on the right stuff and in three to five years, their business will be ready to sell. Of course, in reality, most business owners are lost in the day-to-day and won’t spend time on planning for a future exit. Their business just commands too much of their time. So, erroneously, they believe they will start thinking about exiting in three to five years. On average, they say that for 17 years before they take action, but by then it’s usually too late to make a difference.
Closing Arguments
In this chapter, I’ve tried to build an argument for why exit strategy IS good business strategy. Here are the facts:
Most companies don’t sell. Even when they try to leave, most business owners are stuck with an illiquid asset, and their net worth cannot be monetized
Most successful exits are the result of advanced planning
Most business owners don’t know the benefits of solid exit planning
Chris Snider, CEO of the Exit Planning Institute and author of Walking to Destiny has about the best definition of exit planning I’ve ever heard:
“Exit Planning combines the plan, concept, effort and process into a clear, simple strategy to build a business that is transferable through strong human, structural, customer and social capital. The future of you, your family, and your business are addressed by exit planning through creative value today.”
If you want to take action now to secure the best possible outcome when it comes time to exit your business, then call me. Right now. Or at least, go get my book.
Want to learn more? Check out our podcast:
ABOUT THE AUTHOR
Tom Bronson is the founder and President of Mastery Partners, a company that helps business owners maximize business value, design exit strategy, and transition their business on their terms. Mastery utilizes proven techniques and strategies that dramatically improve business value that was developed during Tom’s career 100 business transactions as either a business buyer or seller. As a business owner himself, he has been in your situation a hundred times, and he knows what it takes to craft the right strategy. Bronson is passionate about helping business owners and has the experience to do it. Want to chat more or think Tom can help you? Reach out at tom@masterypartners.com or check out his book, Maximize Business Value, Begin with The Exit in Mind (2020).
Mastery Partners, where our mission is to equip business owners to Maximize Business Value so they can transition their business on their terms. Our mission was born from the lessons we’ve learned from over 100 business transactions, which fuels our desire to share our experiences and wisdom so you can succeed.