Only 30% of business owners looking to sell find a buyer for their company, and only 10% get what they want.
Interestingly, roughly the same percentage have a robust and documented succession plan, according to PricewaterhouseCoopers’ 2023 Global Family Business Survey, which shows that 31.4% of respondents said they have no estate plan beyond a will, and 37.4% said they have buy-sell agreements.
A lot of the time, it’s because the owner doesn’t have the appropriate team.
“So, you’re talking about [2% to 3%] of all business owners who actually both sell their company and get the number and the value that they want for that company,” said Anthony Cerino, financial adviser with The Hilton Group Wealth Management at UBS Financial Services Inc. in Newport.
He recounted a situation involving a client who believed his mechanical systems company was worth $40 million. The company generated around $60 million in revenue.
However, Cerino saw red flags, including the absence of a formal business valuation prior to the client’s plans to sell.
“He was thinking he could get at least $40 million through the research he had done by himself,” Cerino said. “He had no professional guidance aside from his CPA [certified public accountant]. There were no merger and acquisition advisers, investment bankers, or valuation experts on his team to facilitate a successful exit.”
Compounding the situation, the client was also navigating a divorce, which hadn’t influenced his overly optimistic expectations regarding the worth of the business.
“You need someone to help understand what’s good and what’s bad so that two or three years down the line when they go to market, this business looks pristine and transferable,” Cerino said. “And basically, the buyer can just turn the keys and continue operating or grow how they see fit, which is the most attractive thing to a buyer.”
Potential buyers are going to demand you open the books, scrutinizing recent financials and going back as far as they can to get a better picture of the company.
“Third-party buyers are going to spend a lot of time looking at recent financials from the previous years, which I’m sure he had, but they are going to have their own valuation experts look at it,” Cerino said. “You need professionals on your side of the table who are going to approach it from a buyer’s perspective.”
Another Hilton client, a family-owned manufacturing company in its second generation and headed for a third-generation transfer, had done its due diligence and had the receipts. The company was also aware that the success rate for transition to a third generation is incredibly low, as only 30% of family businesses survive to the second generation, 12% survive to the third generation, and only 3% make it to the fourth generation or beyond.
“Obviously, they’ve gone through this process before, but it was 20 to 30 years ago,” Cerino said. “Four years before they even started, they were hiring and training people for the transition. They were able to get out in front of that by doing the necessary planning and taking this transition very seriously.”
Whether you plan to hit the links in retirement or continue working part time, to build a successful exit strategy, business owners need a competent advisory team to enhance the business value and ensure a smooth transition.
“This could include attorneys, CPAs and financial advisers to maintain a clear understanding of their financial health,” said Kara Museler, Hilton Group financial adviser and senior vice president of wealth management who said many clients are surprised to learn that successful transitions often require years of preparation.
The first question needing an answer is whether a client has spent time educating themselves about the process of transitioning their business.
“If someone came to us today and said they were ready to leave, that’s not enough time,” Museler said. “It’s not only about understanding your exit options; it’s making sure your personal financial goals are aligned with the business objectives, which is vital.”
Cerino said the owner of the mechanical systems firm learned the hard way.
He still operates the company today, “but he didn’t achieve the vision that he wanted for himself,” Cerino said. “As time has gone on, he’s reoriented, trying to build it up to that level to make a smooth transition out of the industry that he’s in, and out of the company.
“If you think about a professional golfer, they are the individual that’s playing and ultimately responsible for the outcome,” Cerino added. “But they also hire caddies, nutritionists and sports psychologists to make sure that all their pieces are covered to help them reach the pinnacle for themselves. And it is really no different for a business owner.”
