Extracting the wealth that is locked in your company should be one of your top goals when transitioning out of your business. While your business can be valuable and generate consistent levels of profit, it is often an illiquid asset that is difficult to turn into cash. How readily you can monetize your business will depend largely on two factors: your chosen exit strategy and how transferrable your business is.
Knowing the true value of your business, your future income needs, and what, if any, role the business will play in providing that income, is a good place to start when determining how best to monetize your business.
“So much of monetization depends upon good financial planning,” said Chuck Richards, CEO of CoreValue, a leading business evaluation software company. “From looking at the data, you’ll know if you have the resources to take the next step.”
The data may confirm your decision to sell your business for cash or lead you in a different direction.
Business owners looking to unlock the wealth in their business should ask themselves this important question: Am I a business-rich, cash-poor owner or a business-rich, cash-accessible owner? The second, more desirable, description requires having two important characteristics:
- Your business operates at a level of efficiency that makes it transferrable and/or attractive to a potential buyer.
- The chosen exit strategy aligns with your personal financial needs and those of your family.
Selling a business generally returns the most wealth to the owner, which is why it’s the most popular exit strategy. If you choose this monetization option, keep in mind one important fact: According to the Exit Planning Institute, less than 20 percent of sales successfully transact. In most cases, a buyer never emerges, or if one does, they are often unwilling to pay the asking price or unable to meet the required terms.
As discouraging as these statistics are, experts insist that owners can dramatically improve the odds of selling—and selling near top of the company’s trading range—if they follow specific steps for improving operational performance and building enterprise value. Richards recommends getting guidance from an outside growth consultant who can evaluate the business on the basis of core value drivers, identify the areas of weakness, and help business owners prioritize their correction.
He also urges would-be sellers to build a strong management team and develop a comprehensive owner’s manual for running the company. The existence of a robust bench and detailed documentation are particularly appealing to buyers, all of whom are risk averse and forward looking.
Some owners have the desire and the personal financial resources to keep the business in the family by making an outright gift or negotiating a discounted price. Either way, Richards believes there should be no strings attached.
“In cases like this, the issue becomes one of control, not money. If you’re going to transfer the business and have your kids take the risk, then the kids need to be in control. If there are concerns, put a board in place,” he said.
Richards also recommends against asking for a lifetime salary. “That’s a fixed cost that just adds more stress to the business, particularly in a bad year,” he explained. “It’s a high-risk debt that never ends and one that your kids will feel obligated to pay just like they pay the electric bill.
There are cases where the best monetization strategy is to keep the business for its cash flow and then close the doors when you are ready to retire. Richards tells of one successful owner who knew that to sell the business, he’d have to invest in expensive new machinery and start working 24/7 again. He ultimately decided against selling and chose to run the company for a few more years.
“We calculated that the current machinery would last another 5 years, and during that time, the business could keep on generating $2 million a year in profits,” Richards said. “If he stayed in business until that machinery died and kept doing exactly what he had been doing, we estimated he’d have $10 million more for retirement and could afford a voluntary liquidation of the company’s assets.”
As you plan your exit strategy, it’s wise to view the business in the context of your personal life. Owning a valuable, transferable asset puts you in control of where you want to go in life and what you want to do. As Richards often says, “The asset is there to make your life better.” It’s up to you to make the most of it.
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CoreValue is not a subsidiary or affiliate of Massachusetts Mutual Life Insurance Company (MassMutual) or its affiliated companies.