When I was young and growing up I would watch my Dad crisscross the field in the Spring in his tractor planting corn and soybeans. Long days of back and forth work only stopping to refill the planter with seed or to refuel the tractor, he always ate while he worked. I would sit in the pickup or ride along with him helping him along the way. The dust would be flying, the smell of freshly turned dirt hits your senses and you wonder how this crop will turn out five months from now? It is an exciting time of year for the farmer. Dad would always have the AM radio on while he planted, listening to farm programming discussing a wide variety farming issues. The noon crop and marketing report was always a must listen.
At the start of a crop season I would ask my Dad what he thought was going to happen to the crop. He would always answer “If the plan I laid out comes together, in the Fall we will be very happy when we run our combine through the fields of gold. Then, we get to start the entire process over again, from scratch.”
I always found it a bit surreal to think that without any choice, a harvest was coming soon, whether you are ready for it or not. Mother Nature will take her due course and you will have to fire up that combine and harvest and, hopefully, enjoy the fruits of your labor and good fortune. Growing a crop becomes a well-orchestrated routine for seasoned farmers. They learn that failing to plan truly means planning to fail.
Basically a crop season is a small mini version of what most business owners face during their full lifetime. Growing a business is like growing a crop, eventually, you must harvest it, whether you want to or not. The emotionally hard part is that, unlike the farmer who relies on the science of agronomy to help guide him as to when it’s time to harvest, how does a business owner of a manufacturing or construction business or any other family owned business know when it is time to harvest? From what I have personally experienced, no such science exists for that model; it is much more personal than that, it is art. And like art, the beauty is often in the eye of the beholder.
Here are an assortment of issues a business owner will likely feel or face when discussing their desire to finally harvest and sell the business:
- Think long-term: Is the business at a competitive advantage and do you have a viable business plan and management team. Even if you do, you must ask yourself if you still want to be the one at the helm making the day to day tough decisions. How anchored are you to the success of your company? Could you go on a three month vacation and come back without total chaos? If you are not on a clear path or do not want to run the company you have built, it may be time to harvest and sell.
- Give yourself plenty of time: This is a key element of any transition plan. Planning to sell a business that you have built and ran over your lifetime is not something you do overnight. It is best to give yourself three to four years to complete the transition planning. Buyers will want to evaluate every detail of your business, especially cash-flow, income and tax statements. Shoring up loose ends to make your company as profitable and presentable as possible will go a long way during the due diligence process.
- Understand the likely value of the business: Many variables come into play here, but in the simplest of terms a business is worth what a willing buyer would pay to a willing seller. A valuation expert, such as a CPA with an ABV (Accredited in Business Valuation) designation or a CFA (Chartered Financial Analyst) can help in this area. How you get to that number will vary from industry to industry, but certain approaches usually prevail, such as:
- Asset Approach – Add up your assets and liabilities. The net number is your value under this simple approach.
- Income Approach – This is a present value calculation of the company’s income stream.
- Market Approach – Using data from within your specific industry to provide a gauge of value. Usually incorporates some multiple of sales or earnings to arrive at a number.
- Understand how your business functions within your comprehensive financial plan: To better help one understand this issue, a financial advisor specializing in this area will help you have frank conversations regarding exit strategies, family dynamics, estate planning, income planning and tax planning to name a few. Given the role a privately held company plays in the financial AND emotional life of its owners, the analysis is crucial to the planning process.
- Who should be on my team when I sell? Undoubtedly, this is another area where different businesses require different teams. So who should be on the bus helping you drive this decision? You should assume the buyer is going to have a good team on their side, so consider including an appraiser, attorney, a financial planner, consultant and business broker.
- Understand your unique business cycle: Before you decide to sell, look back on past business cycles and market conditions to gauge where you are at now. If your business is in an uptrend and you feel the momentum of your business is likely sustainable, then now could be a good time to start looking to sell. Selling a manufacturing business looked pretty good in 2006. Fast forward a couple of years and many companies in that field, especially home builders, roofers, siding and home refinancing companies saw their market value diminish greatly.
- Would I want to stay with the acquiring company? This may happen if you are determined to be THE key employee. If the blue sky of the company is tied to your relationships and goodwill, you may be asked to stay on as part of the deal. Perhaps full time, perhaps a part-time consultant. No matter what, you must first determine if that is really worth it to you. If staying on helps increase your value in the end, than perhaps it is.
- Understand the various ways one can transfer a business. If an outright sale is not in the cards, a business broker or CPA or investment banker can help you evaluate other potential options. What about your key employees or family members in the business? What options should you consider here; perhaps an Employer Stock Option Plan (ESOP) would make sense? Another option is to sell a portion of your company to a minority shareholder. Lastly, how about a private equity fund buyout?
As it is in farming, many variables go into planting, growing and ultimately harvesting that golden crop. It’s just that any harvest advice is completely worthless when it’s not used within the context of an actual plan or well-defined process. Trying to create a plan on the fly when the business harvest season arrives is a great way to make things even worse. And praying that someday a golden goose will come along and swoop you up does not constitute a plan.
Based upon our experiences working with family owned businesses going through this process, the decision to harvest your business will always come down to your core emotional and financial reasons at that time. If you have a plan in place you should be able to recognize which pieces of advice make sense for you and your situation.
These periods are never easy because the closer you come to your fall season, the more emotional things tend to get.
Written by: Phil E. Gose