Over the past few years, turmoil in the global market and considerable impacts of COVID-19 shutdowns have created two distinct groups of business owners: those who have successfully transitioned their business to new ownership and those that wish they had started sooner. Rarely do we hear of an owner who believes they transitioned too soon. As we circle back with our clients within months after closing, we hear a common theme of unforeseen major changes that occurred post-closing. Below are a couple of key issues that come up most often.
The current labor shortage has changed the landscape regarding how employees view their current job. Additionally, it has created more job options than ever before. Even if an employee agrees to stay prior to closing, there is really no guarantee they will stay post-closing even with reasonable bonuses or incentives in place. While we see many ownership transitions go well, sometimes, weeks or months later an employee may relocate or have a life-altering event causing them to change jobs. Now more than ever, the value of a business is based on the experience and tenure of the company’s employee base that will remain with the company through the ownership transition. As owners set their business up to sell in the next few years, key employees leaving prior to the sale can play a pivotal role. The perceived risk in the viability of the business increases more dramatically than if the employee stays and then chooses to leave after the sale. When key employees exit their job unexpectedly, this can quickly erode the value of the business and require the owner to build the business back up again over a period of years which may greatly hinder their exit plan.
Growing to the Next Level
Our firm has conversations regularly with owners who are not ready to sell yet and believe they can grow their business to the next level and significantly increase profitability by two times or more. Though there are exceptions, we see often that the owner fails to grow the business within the planned 2-3 year period. Through these well-meaning efforts, the business incurs additional costs while trying to find a good salesperson or increasing the marketing spend which can cause revenue and profitability to easily reverse. While the idea of adding a new product line or revenue stream sounds great, it may be better for a new owner to pursue as a strong growth opportunity. It is a hard reality when these trends become evident in the annual financial comparison and can make the salability of the business questionable with downward trends year over year. This is a big risk versus reward scenario which is why the current owner really needs to answer the question, “Do I have the passion and capacity to drive the business to the next level, or is it better if someone else takes the wheel?” While health and age are often factors, the answer is more about business growth cycles which require various mind sets and different core competencies to help take the business to the next level.
We have helped many clients weigh the risks and figure out the best time to sell based on their unique circumstances. Fortunately, many of these companies have done very well under new ownership after going through our proven sales process. This has helped protect the legacy of many great local businesses resulting in job creation and spurring economic growth in our community. The majority of our business comes from referrals, and we appreciate your continued trust in our firm.
Robert W. Amerine
President, CBI, M&AMI