Valuation, Sale and Succession Planning – The Right Timing Dilemma
I asked many of you a simple question – What is the best time to start sale planning (loosely called as succession planning by many – in case you don’t recollect my previous posts, these two things are different but there is some overlap and hence the confusion) of your firm? An assumption I am making though for this post, is that succession and sale planning are the same…In this post, I am going to share my perspective on the best time and a few other insights on sale and succession planning…
What do you think are the answers I might have received?
But first, let me explain the question correctly so that there is no confusion…
Let’s say you want to sell the firm.
What is the best time for you to start the process?
What is the best time for you to start looking out for a buyer?
Is this clear enough?
I believe so. I read it a few times and I could not find any gaps at least for now.
Forget the answers of others for a moment, what is your answer?
I am going to wait for a minute or two…
The most common answer was 18 months before, some said 2-3 years, but the max I heard was 3 years.
What did you answer?
Are you going to change your answer?
Before I tell you my answer, let me share the most common scenarios that take place in our industry.
- A person decides to sell and then wants to exit as soon as possible:
There are people who come up to us and say I want to exit in 18 months…Or I want to exit as soon as possible…
Some are in a rush to exit and get into a very different line of business…For example, someone we spoke to wanted to get into a different industry – outsourcing, but they did not have enough bandwidth to start the new one unless they sell off the existing one. Others have different reasons to exit…
No matter what the reason, there is a big problem here…
Can you visualize the problem?
If not, you will understand it by the end of this post…
I am not saying these folks will not get an exit as we have provided interesting exit options to many such financial professionals but there is a finer point that is often missed.
2. A person decides to do NOTHING (not deciding to take action is the same as deciding to do nothing)about succession or sale planning. He / She maintains the status quo.
One fine day, he /she passes away leaving behind no one…We have heard countless such cases and our hearts go out to the families of these people…
In such cases, all the hard work done by this person disappears in a day…while not exactly in a day but you get the point I am making.
3. A person decides to sell internally to a family member or team member(s).
This is such an important topic that it warrants a series of posts of its own, but the key point that I want to highlight is that many end up handing over a not so well managed asset to an inexperienced or a less sophisticated person (or team).
Read the highlighted line again and mull over it.
Someone we know has been operating a MFD business for the last 25 years. The couple hired a gentleman from a financial services firm as a form of succession. The point that is missed out in a transaction like this is that the problems that existed in this business before this person came in now not only continues but it compounds… Additionally there is a lot of value erosion that takes place because nothing much has changed except that some new person has come in. And this phenomenon is not restricted to India, it’s the same in the US and other global markets.
I guess it’s time for me to give the answer but there is an important point that I need to address… This is about the value of your firm.
Forget the three common scenarios above for a minute…
The first thing that every business owner must know is the value of their firm. This is not something to be found out when you decide to sell internally or externally. Knowing the value of the firm is the starting point…It is only when you know the real value of something can you figure out what you need to do to build or enhance the value of your firm.
Do you know the value of your firm?
The answer to this is likely a clear NO.
But isn’t this likely the biggest asset you have?
Shouldn’t you at least know the value of this asset? Not just once but how is this asset appreciating or depreciating on an annual basis?
Shouldn’t you know the drivers of value for the asset that you have built?
Knowing the value and the drivers of value can help you make decisions and take actions to build real enterprise value. And these two are the most important things. The sad reality is that most business owners in our industry have not calculated the real value of their business. More importantly, they ignore the key drivers of value for their firms. We are doing a workshop on Valuations to help you figure out ways to value your business and more importantly learn about the key drivers of value of your business (and how to enhance your business value).
Now let’s get to my answer to the initial question I had asked…
The best time to start succession/sale planning is at least 7 years before you decide to sell or have a successor in place… Some firms globally take even a decade or more for this. Transition advisors (folks who know this subject well…) generally have different suggestions for the best time to begin exit planning, suggesting anything from ten years before the sale of the business to as soon as you start the business(which might sound a bit extreme but it’s not).
The biggest issue for you in dealing with the above could be that life, distractions, and busyness get in your way. The choice you make between busyness and thinking is clear because it’s easy to postpone something that might make you uncomfortable…So you comfort yourself by saying, “I will deal with this later.” But we all know how this plays out…
Starting seven years or even a decade before you think of selling gives you enough time to address things that need to be addressed (there are hundreds of variables) so that you can make course corrections and build real value for you, your family, and your team.
But the fundamental questions are “Will you do what needs to be really done? Will you figure out your value first? Will you figure out the drivers of value of your business? Will you figure out what you need to do to make your firm irresistibly attractive to clients, team members and buyers?”