False Assumptions Business Owners Make About Planning an Exit

False Assumptions Business Owners Make About Planning an Exit

Matt Gilbert

June 27, 2019

Business owners often get nervous when they start thinking about exit planning. One recent study found that less than one-fifth of owners had drafted a formal exit plan. So why aren’t business owners more aggressively preparing? Research shows that many mistakenly believe that selling a profitable business is a simple process similar to that of selling a house, requiring little forethought or pre-planning. Consequently, they are cavalier and have the attitude that they will plan when they are ready to sell. 

Advisors working with business owners routinely must dispel two damaging assumptions:

  1. That the process of selling a business is as simple as getting an “opinion of value” from their CPA and having an attorney help with the paperwork. 
  2. That buyers place more emphasis on historical performance than is actually the case, and that these buyers will accept “reasons and explanations” for less than stellar past performance while accepting a rosy and flawless future forecast.

Exiting a business is typically the most significant financial transaction of a business owner’s entire life. Yet most have no actionable plan for this key moment. M&A advisors and exit planners exist to help owners plan and execute this important event. But to do so, they have to overcome these and other damaging assumptions many owners make. 

The Myth That Selling a Business is As Easy as Selling a House and That Buyers Will Pay Top Dollar in Immediately-available Funds 

At a bare minimum, a business owner needs to be able to answer the following: 

  • What is my business worth, and how can I justify this value? (Dozens of variables affect this figure.)
  • How much income do I need per year in retirement? (Don’t forget to adjust for inflation.)
  • What is the likely return on my investments? (Is this a conservative expectation?)

The Myth That Buyers Will Excuse Past Performance and Simultaneously Pay-up for a Business’s “Potential” 

Many business owners will experience a shortfall unless they either improve the “sellability” of the business or reduce their expectation of its value. Not putting themselves “in the buyer’s shoes” is what’s behind this common misconception:

  • Buyers scrutinize and inspect every aspect of a business in order to develop an offer price, an ROI projection, and a growth strategy.
  • Buyers employ their own team of “experts” who are savvy in accounting, operations, sales, and other areas to help them make realistic assumptions of transferable value.
  • Buyers and their advisors focus on 8 key drivers (along with many lessor factors) of transferable value when determining how to pay for an acquisition.

Misinterpreting how a buyer perceives and pays for value causes business owners to greatly underestimate the time, resources, and effort required to maximize an exit. For many, avoiding exit planning altogether is a relief tactic. Thinking they already have enough to do, the last thing they want to do is think about an uncertain future - or to realize that their rosy outlook should not be so sunny. While exit planning can feel daunting and scary, owners must look at their business through the lens of a buyer if they want to position the business for a lucrative sale. Only in so doing can they ensure their financial goals are met heading into retirement. 

About GaP Business Advisors

Gilbert & Pardue Business Advisors (GaP) is a Houston-based business advisory firm serving  lower middle and middle market owners from coast to coast through representation for Mergers & Acquisitions (M&A) and through business value-growth services such as Fractional CFO, Advisory Board, Executive Coaching, and Consulting.

Matt Gilbert and Bret Pardue established GaP to provide owners of  lower middle and middle market businesses – those businesses generally enjoying annual revenue of $5-$50 million – with the quality of M&A representation and value-enhancement services previously only available to middle, upper middle, and large businesses. GaP brings highly-experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.

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