by Susan Hileman, NWIRC Strategic Business Advisor

Company owners are often disappointed when it is time to transition and they find out their business is worth less than they imagined. Or, they sell the business at a good price but after taxes and transaction fees, they’re left with only 60% to 70% of the proceeds. According to the 2016 Business Owner Survey by the Business Enterprise Institute, 75% of business owners would exit today if they had financial security, but only 17% have put an exit plan in writing. Here are three important financial questions owners should ask before considering a transition from the business.

Can you afford to retire? For many owners, the business itself is the retirement plan. The owner may have invested profits back into the business to keep it growing, and the plan is to simply sell the business for cash. However, the sale price needs to be able to provide enough for retirement. So how much money do you need to live on? And what if the business can’t be sold at your asking price? Perhaps you’re going to transfer the business to someone in the family. Will you be asked to carry the paper on the purchase? The question then becomes BOTH can you afford it and can the business afford the repayment? As a consultant who has worked with family-owned businesses for years, I recommend you start with solid data. First, determine both the financial resources you have and those you will need. Your CFO can generate an accurate cash flow forecast for the business and your financial advisor can supply a realistic assessment of your personal income and investments. Then look at your spending—both current and what’s planned in retirement. Travel? Hobbies? Grandchildren? Health insurance? This is not an area to make a guess as the cost of living is not going down. Use solid data and realistic projections to back up your decisions and help determine if you can afford to retire. If it turns out you can’t right now, use that time to work on strategies to boost the value of your company.

Have you cleaned up your books for ease of sale? Smart business owners do take advantage of tax saving opportunities. Cleaning up your books simply ensures potential buyers can determine how profitable the business really is—or what potential exists for growth. Many owners use the business to pay home or lifestyle expenses. Others have rental income paid through the business which might not be required moving forward or a family member who is a full-time, fully documented and taxed employee who happens to have a generous salary. You may need to advise the buyer on positions or costs that should be eliminated or adjusted. Will existing salaries continue under new ownership? What about bonuses? Does the business or current owner have leases or property—cars, trucks, equipment, buildings? Will these all remain with the business? Are there personal guarantees on existing debts? Younger owners, including family members, might not have the capital or credit worthiness needed to purchase the company and maintain the businesses required line of credit. Insuring your books are cleaned up well before a sale will give potential buyers a realistic picture of the financial state of your business and can provide a smoother and more profitable transition.

Do you know your company’s worth? In addition to hard assets of building and equipment, there are other value drivers a company can capture including a differentiated value proposition, a strong brand or reputation, quantified customer satisfaction, and audited financial statements… among others. A company with strong value drivers is likely to demand (and receive) a higher dollar than a company with lower value drivers. A Core Value Assessment Tool, for example, can provide an uncertified valuation of both your overall business worth and the value of functional components within your company. As the 2016 Business Owners Survey results indicates “it is highly unlikely that in the next 10 years there will be enough capital to enable the number of outside transitions (sale to a third party such as private equity or strategic buyer) preferred by business owners. As such, owners will need to take a more serious look at inside transition options such as employee stock ownership plan (ESOP), management buyouts, and family or be forced to substantially discount the sale of the business to a third party.” So the time to build value and increase your company’s worth is now!

Let us know if you have questions about how the NWIRC can help your business prepare to navigate the waters for exit planning.

Susan Hileman is a Strategic Business Advisor at NWIRC. She is a Galliard trained Family Business Advisor, an Innovation Engineering Green Belt, and has degrees in Business Management and Speech Communications from Clarion University.