He’s also heard from clients who want to get out of the business in under two years.
“There’s no magic in the time frame,” he said. What’s more important is that the owner is able to “look in the mirror and say, ‘I really don’t have [an exit plan]. That’s part of good business fundamentals, so I’m going to start educating myself on what the options would be regardless of the timeline.’”
Trench believes that business owners should always be thinking about selling. “There’s nothing more exciting about owning a business than selling a business,” he said.
Practice good accounting hygiene
“Nobody really wants to pay for accounting,” Harkness acknowledged, but cutting corners in this area can cause huge headaches or kill a deal.
“When you bring in outside bankers and private equity groups and bond companies and attorneys, … they dive really deep into your accounting,” he pointed out. “If your accounting practices are bad or you can’t stand behind the quality of the earnings that you’re reporting year over year, it just creates a mess.”
Documented compliance with labor and safety regulations is another factor that can be overlooked to owners’ dismay when transferring a business.
Harkness advises his clients that transition planning is “about valuation, it’s about net cash after taxes, debt and fees, [but] it’s also about the quality of your earnings and the quality of your operations.”
Some potential buyers may even walk away from a deal rather than try to sort through a business’s unorganized or inaccurate recordkeeping.
Harkness warns that sometimes, “the valuation and the accounting is the easy part.” Identifying a successor, especially when the owner would like to keep the business in the family, can be difficult and emotionally taxing.
“We’ve been involved in transition plans with families where … Mom and Dad have to pick one sibling over another,” he said, or where they’d like to split ownership between their children, but “one sibling is a rock star and the other sibling doesn’t have the same work ethic and goals.”
‘Peace of mind’
Successful transition plans don’t just generate big pay days for business owners. There are lots of examples in this industry of owners who have done just that, Harkness said, but “it’s not just about wealth; it’s also peace of mind that my people and my customers can continue on with something that I built as an owner. That’s exciting for us to be involved in.”
For Trench, many of his transactions were handshake deals. “I thought [they] were fairly done, and I thought I got out of them what I expected and what I deserve.”
Even in transactions where he was the buyer rather than the seller, “I just looked at what I thought I could make out of the company and what I thought was a fair value to those people. … There was no science or equations that were necessarily used,” he explained.