Flip the Switch

Recently I got an e-newsletter from my friend Allan VanderHamm with Berntson Porter.

Allan is their valuation and exit planning expert and the newsletter was titled, “How Does Exit Planning Protect Business Value?” My response to Allan was:

One of my lines is, “Owners don’t wake up, flip the switch, and say I want to sell in 2, 3 or 5 years. They flip the switch and say, it’s time to get out (now).”

The newsletter told the story of two owners of similar businesses and how one owner worked very hard, “in the business” and the other sought and acted on advice and worked, “on the business.” The latter owner built a team, converted to S Corp status, and did something near and dear to my heart, grew by acquisition (one of my top reasons to consider growth by acquisition – along with 18 others in my book Company Growth By Acquisition Makes Dollars & Sense – covers how the larger the company the more it will sell for, all else being equal (because the multiple of profit gets higher as businesses get larger).

Planning is important, as is timing. I recently had discussions with a client who would like to sell to one of his three competitors (given his industry, these are the only logical buyers). We talked about where the business is, where it will be (this year is shaping up to be a very good year for him), and the time of the year (it’s a seasonal industry and now through September is the busy season).

While he has a feeling of urgency to move on to his next great adventure in life, it makes sense to do a few things within the business, go full speed ahead to maximize revenue and profits, and be able to present a great story in six months.

The above is a mini-version of a planning story. It does take time and effort to shift from, “what we do now” to “what we need to do to make the business more attractive.” And it can be threatening to an owner who wants to be in control of everything, because one thing that makes a business more attractive, and adds value, is a self-sufficient management team. A solid team means there’s a greatly reduced likelihood of a dependency on the owner.

The last point about owner dependencies is one of my top four things an owner can do to increase value, make the business more attractive to buyers, and have a better business along the way. The other three things are:

  • Show you can grow, don’t just say it or say we tried to keep the business where it is.
  • Have solid financial systems and accurate financial statements. (One of the first things I do when I see financial statements is check if the year-to-date income on the P&L is the same as the year-to-date income on the balance sheet. You’d be surprised how often it isn’t the same.)
  • Demonstrate you can attract and retain good employees (especially in our currently tight labor market).

Conclusion

The 80-20 might even be the 90-10 rule when it comes to owners flipping the switch. It is tough to manage a business, be in control, and implement (a new) strategy. So, it all catches up on the owner, they flip the switch, and say now’s the time. Finally, this is completely different than the owners who are coasting by design, as in, I’m making good money so why would I want to work harder to make more? It’s the same end point but via different routes.

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