Most owners wait until they’re ready to retire before they get serious about planning a transition. While most deals can be completed within 6-9 months, getting a deal done versus getting the price and terms you want can be very different things. There’s a cost to waiting until the last minute to plan an exit. Very often, one or more issues related to price or terms surface and can even derail the exit plan.
- Value Less Than Desired – When a formal valuation is done, often the value is lower than expected. Transition experts, like GAI, can help an owner increase the value of their company, but it takes time. Changes and improvements may generate greater growth and profitability, but that new level of performance needs to be demonstrated for at least a year or more to properly boost the value of the business. If an owner waits to address this, he or she may be forced to accept a lower value.
- Price Less Than Desired – The price a buyer will pay for a company is very often near the formal valuation figure. Price is often a multiple of EBITDA. But as the wave of Boomer-owner retirements builds (and it really started building in 2021), there will be a growing surplus of businesses on the market looking for a buyer. An ever-increasing surplus can result in falling multiples. If an owner waits too long to sell the company, he or she will be forced to accept a lower price due to the surplus of sellers on the market.
- Less Desirable Terms – Another consequence of a growing surplus of sellers is that buyers can become more demanding and may require terms that an owner may find undesirable. They may demand a significant earn-out, where the owner must “earn” part of the purchase price based on the performance of the business following the acquisition. Or buyers may demand that the owner stay on for an extended period (1-3 years) to ensure performance. If an owner waits too long to sell the company, he or she will be forced to accept additional terms because they’ve lost their leverage due to the surplus.
Actions to Take and The Benefits:
- Conducting a formal business valuation is one critical step an owner should take, ideally a year or more in advance of a sale, to avoid surprises and maximize value. A formal business valuation should be conducted to establish an unbiased value for the business.
- The Boomer-owner retirement wave has begun, the surplus of sellers over buyers will consistently increase, and the surplus will likely persist for another 8-10 years. Given the dynamics of the marketplace, the best way to ensure a high multiple (and therefore a strong price) is to put an exit plan into action sooner than later.
- The same advice to maximize multiples holds true for deal terms. The sooner an owner acts, the more leverage he or she will have over the terms of the deal.
Bottom Line Waiting until a few months before your desired retirement date usually produces less than desirable results. Taking action well in advance of a sale will either uncover issues that can be addressed (so the business is attractive to buyers) or prove that everything is in order for a business exit on your terms.
*Source for content: Exit Planning Institute. October 2021 Newsletter. “The Cost of Inaction on Your Business Exit Strategy.”