If you talk to anyone who has known me for longer than an hour, they’ll most likely tell you that I gave them a book recommendation. As an English major, former bookstore manager, and avid reader I can’t resist trying to put books and people together. I secretly judge myself on my speed and accuracy. I’m like the Annie Oakley of business reading lists.
Not too long ago, however, I got shot down in record time. During an initial meeting with a business owner, the conversation started with the owner telling us she had finally decided to sell her business because of a book she’d read. Adding insult to injury, it was to be a book I’d never even heard of. (The horror! The horror!)
The title was Necessary Endings: The Employees, Businesses and Relationships That All of Us Have to Give Up in Order to Move Forward, by Dr. Henry Cloud. Of course, I read it immediately.
The author’s premise is simple yet profound: Most of us are simply bad at ending things.
Whether it’s firing an employee, discontinuing a product line or exiting a business, few of us have a talent for graceful dismounts. We’re more likely to botch our efforts to end something important, delay action as long as possible, or avoid the task entirely. Yet the reality is that success in business, and life, requires us to get good at endings.
A tsunami of endings on the horizon?
While business start-ups dominate headlines, the topic of successful business exits has been getting more and more coverage thanks to the generational juggernaut known as the Baby Boomers. Here are some quick numbers around retiring Baby Boomer business owners:
- As of January 1, 2011 Baby Boomers are turning 65 at a rate of about 10,000 a day; a trend that is predicted to last until 2030.
- According to a 2007 U.S. Census Bureau report, 66 percent of all businesses with employees are owned by Baby Boomers, totaling nearly 4 million companies.
- Retiring Boomers will trigger the largest generational transfer of wealth in U.S. history — some say as much as $10 trillion — with much of it trapped in the equity that has been built in small businesses.
Yet the task of taking your chips off the table as a business owner, regardless of what exit strategy you choose, is notoriously difficult. In fact, there may be no other time as a business owner when the odds are so heavily stacked against you as when you try to sell your business. We’re all familiar with the dismal statistics associated with starting a business, but the odds of successfully selling are equally slim. Depending which study you read, most research shows that only 11 to 20 percent of businesses that are taken to market ever actually sell.
Business endings have a logical starting point: Valuation
One of the primary reasons for the low success rate associated with business sales has to do with owners having unrealistic expectations around businesses valuation.
“I can tell you the exact value of any business in a matter of seconds,” a colleague and veteran dealmaker once told to me. “I just ask the owner what they think it’s worth, and then cut that number in half.”
His comment might be funny if there wasn’t so much truth in it, and the stakes weren’t so high. Business owners take an enormous risk by having much of their net worth — typically between 65 and 85 percent — trapped in one, highly illiquid asset: their business. These same owners may also expect to fund all or part of their retirement with the proceeds from a sale. Planning to sell a business for $5 million only to find it has a market value closer $3 million is no laughing matter.
This is often referred to as the “value gap.” The best way to close it is to develop an understanding of the value of your company — and what drives it — well in advance of selling your business. This allows enough time to implement value enhancement strategies at your business, or adjust your post-sale plans accordingly.
My well-read client was just one of millions of Baby Boomers facing her last big milestone as a business owner. While we deal with all kinds of difficult endings as owners, business valuation is a logical place to start when planning a successful business exit. Getting a business valuation today will go a long way towards ending your story as a business owner on your terms, and freeing you up to start the next chapter of your life.
A revised version of this article originally appeared in Arkansas Money & Politics magazine.