Do Your Children Want The Business?
by Valerie Vaughn
For over 25 years, MAMTC has helped our clients achieve success. We’ve worked with hundreds of Kansas manufacturers, helping them optimize their operations, develop their workforce, and see real growth in their businesses. Our team of engineers and business experts has developed impactful solutions to real manufacturing problems.
Over the years, we’ve had questions come up in areas outside of our expertise and have referred our clients to third parties specializing in those areas. In doing so, we’ve developed a strong network of trusted specialists.
We want that network to be as impactful as possible for our clients. So, we’re establishing more formalized partnerships between our clients, our network of vetted specialists, and MAMTC.
Part of that partnership network will include blogs by key industry leaders.
Today's post is from Valerie Vaughn of Apex Business Advisors. This is the first of a two-part series that will explore selling your business. The series will cover steps you can take to prepare your business for sale, factors that can make a difference between selling at a premium or a discount and the best time to sell.
It’s a question I asked almost every owner I met during my MAMTC career. For three years, my role at MAMTC was to consult with every single manufacturer in five Kansas counties. As I attacked that lofty goal, I would ask owners “Do your children work in the business? Do they want to take over the company when you’re ready to step out?”
I cannot remember one owner saying “Yes, my son / daughter wants the business.” Many said their children weren’t interested or were following other career paths. Some were sad the next generation wasn’t interested but most were content to have their children pursue other career options.
If passing the business to the next family generation isn’t in your future, I hope you’ve given thought to what will happen when you exit. A recent survey by Securian Financial Group shows that over 50% of business owners plan to leave their business in the next 10 years but few, just 28%, have started to plan for a successful exit. Uh Oh. Big disconnect.
What’s your exit plan? Are you one of the proactive few or part of the majority that hasn’t found time, doesn’t know how to get started or merely doesn’t want to think about it? You can continue to ignore your mortality or plan for a smooth transfer that guarantees your business will continue long after you retire. Wouldn’t it be better to plan?
At this point you may be thinking “I’m not ready to sell; not even close.” and yet I encourage you to continue reading because it takes years to prepare a business for sale.
Preparing a business for sale is similar to preparing a home for sale. The goal is for the home, or business, to appeal to the highest number of potential buyers so it will sell more quickly and for more money. However, the length of time you need to prepare for a sale is very different. While a home can be staged in a matter of weeks it takes at least three years to prepare a business for sale and few are ready without preparation.
The steps you’ll take to prepare your business for sale are like Value Stream Mapping (VSM) a process in your production facility: you’ll define the Current State and the Future State of your business (sold for maximum value), determine the gap and develop and implement a plan to close the gap. Let’s get started:
DECIDE.
You have already taken the most critical step if you have decided to sell your business someday. It’s a mindset thing. Once you’ve made the decision you’re building a business to sell you’ll see it as an asset to be developed rather than something to be maintained at status quo.
DEFINE CURRENT STATE.
Identify your starting point. In VSM language, you’ll define the Current State. Lean Manufacturing teaches us that value can only be defined by the customer so your business’ current value is not defined by your accountant, your insurance company, or comparison to the business Joe or Harry sold last year. The value of your business is what it would sell for if on the market today.
There are accredited business appraisers who can provide formal valuations and you should expect to pay $5,000 to $50,000 for this service. Alternatively, a knowledgeable business intermediary can help. Many offer no-charge, or low-charge, consultations and will give you an estimate of market value as well as identify obstacles to sale and opportunities for improvement.
DEFINE THE FUTURE STATE.
Try to get as clear an understanding as possible of the Future State of both the company and your personal requirements. What do you want to do next and what amount of money will you need to take from this phase of your life to fund the next phase? When would you like to sell?
PLAN.
Current and Future States are defined and it’s time to identify and plan the business improvements needed to close the value gap. As you do this try to look at your business through the eyes of a prospective buyer. While it can be difficult to be objective a successful sale depends on it.
IMPLEMENT.
The final, and perhaps most difficult, step is to implement on the plan. You’ll want your business to have “curb appeal” that will draw in multiple buyers so you will receive multiple offers to consider. You’ll also want the business to pass the due diligence process and be priced so that you receive maximum value and a buyer is able to obtain financing for the acquisition.
SELL OR JUST BE SALE-READY.
You've closed the value gap and prepared your business for sale. It has taken time and effort but as you’ve worked to perfect it you’ve enjoyed the benefits of a more profitable, productive, streamlined and efficiently managed business. You’re ready now to sell or keep the business and enjoy the cash flow it produces. Having a business sale-ready is a great place to be; it gives you the power to decide when to sell.
Remember, value can only be defined by the customer so you will not be able to increase the value of your business until you understand how potential buyers are likely to value it. Watch for the last of this two-part series which will cover value drivers that can make a difference between selling at a premium, or at a discount, and the best time to sell.
Valerie Vaughn worked with MAMTC from 2009 – 2012 as a business development consultant. During that time, she developed a passion for helping small and medium sized manufacturers improve their businesses. Valerie continues to work with small and medium sized business owners just in a different capacity; she now helps them acquire and sell businesses. Valerie is a certified M&A professional with Apex Business Advisors in Overland Park, KS and can be reached at vvaughn@kcapex.com and (913) 433-2315.