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Be sure your business is always ready to sell

Brian A.  Trzcinski

Posted on June 01, 2022

MassMutual specialist in business market development.

Baby boomers own approximately 4.5 million businesses with employees in the United States, and it’s estimated that 70 percent of these owners will be retiring over the next decade. According to the 2022 MassMutual Business Owner Perspectives Study, 60 percent of today’s owners say selling their businesses is their preferred exit strategy.

The problem? Historically, 75–80 percent of businesses that get put up for sale never sell.

So why do so few businesses transact? Simple. The business (and the owner) isn’t ready. In other words, owners haven’t built a transferable business — one that has the ability to generate future revenue and profit after they leave. In many 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 due to a proliferation of risks uncovered during the due diligence process

When owners take the necessary steps to build a transferable business, the timing of their exit becomes irrelevant. However, owners are often their own roadblock to building a transferable business because they are:

  • “Unicorn hunting.” They are holding out for that perfect buyer. In fact, 62 percent say they will exit only when the right buyer comes along.
  • Viewing the business as their “baby.” They are not taking the necessary steps to select, train, and groom the right successors. In fact, 52 percent say they can’t exit because no one can run the business like they do.
  • Viewing the business as their “lifestyle.” They can’t exit because their personal financial well-being is inextricably tied to the business. In fact, 60 percent say they would exit sooner if their future financial security were assured.
  • Attempting to sell a business in decline. Potential acquirers want assurances that a business’s revenue and profit will grow even after the owner leaves. Unfortunately, only 38 percent of owners say they want their successors to grow the business beyond where they took it.
  • Attempting to sell a job, not a business. Potential acquirers aren’t buying a business so that they can get into the weeds and manage every nuance of the business. Yet only 34 percent of owners have built a strong management team to make the owner redundant in the business.

Still, the number of business transactions is on the rise; there was a 24 percent increase in transactions from Q1 2021 to Q1 2022, according to online marketplace BizBuySell. And of those business owners who transacted, 55 percent said retirement was their main motivation for selling.

Building a transferable business

With retirement looming for baby boomer business owners, many want to exit, but few have taken the necessary steps to build a transferable business. Here’s what you can do to help ensure that you find a ready, willing, and able buyer for your business when the time comes to leave.

  1. Have an experienced management team in place. When the transition occurs, an acquirer wants the team to be well-trained and ready to continue responsibility for day-to-day operations. The management team can also provide valuable continuity throughout the transition, maintaining the flow of goods and services, fortifying relationships with vendors and clients, and fostering the continued loyalty of valuable employees.
  2. Have sufficient documentation, especially for detailed policies, procedures, and processes. Documentation that simplifies complexities in the business and protects competitive advantages in the market will ease transferability and strengthens an acquirer’s belief that the business will continue to be successful when the owner is gone.
  3. Position the business to maximize key value drivers, such as streamlining operations, modifying the capital structure for growth, normalizing the books to eliminate any commingling of personal and business expenses, and more. Owners who fail to do this can find it difficult to find a buyer willing to meet the seller’s price and terms.
  4. Reduce risks, such as owner dependencies, lack of diversification in products, customers and vendors, and incomprehensible financial reporting and legal documentation. Potential acquirers will make an offer based on how much risk they must assume. The less risky the business, the more they are willing to offer. Too much risk and they will simply walk away.

Transferability risk can also emanate from threats outside the business and are out of the control of the owner, such as increased competition, shrinking market size, and decreased barriers to enter the market to name a few.

That’s why it’s so important to get what you can control in order and not procrastinate with your transition planning. After all, the goal is to build a business that stands out among all the businesses in your vertical ― so that it’s your outfit that acquirers want to chase.

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.