Shift your mindset from owner-operator to owner-investorChia-Li Chien, Ph.D., CFP®, PMP®, CPBC
Chia-Li Chien | Feb. 09, 2015
Have you ever heard, “you can’t finance your retirement, so let your children take out a student loan”? Well, this is to encourage you to take of yourself first, right? In reality, you are financing a portion of your retirement when you exit your business, regardless of whom you sell.
In Succession Financing in Family Firms. Small Business Economics, Koropp (2013), an empirical study shows that both internal and external transfer involves some debt or equity financing, especially in family owned businesses (FOB). The study indicates that models of multiple owners (including husband and wife teams), multi-generational business or having a family member as CEO or a non-family member CEO, all have a propensity for financing debt. The authors also point to a four-year study which revealed that of all the FOBs transferred, 57% transferred internally and 43% externally, using debt financing.
They also suggest that owners need to shift their mindset from owner-operator to owner-investor.
Treating your business as an investment is critical during the reign of your empire. Just like the stock market, there are many factors that impact your return on investment in business. Savvy professional investors would say, “You can’t time when to buy or sell your stock.” But business owners can create favorable conditions to enhance the timing of their exit.
What makes a business valuable?
Timing. Timing. Timing.
- Economic Timing: The overall economic cycle impacts the buying and selling sentiment. The multiples average comes from M&A market activities.
- Personal Timing: How ready is the owner emotionally, and is the right retirement integration and transition in place?
- Business Timing: Does your business possess a competitive edge to be attractive in your industry?
In Sell Your Business for an Outrageous Price: An Insider’s Guide to Getting More Than You Ever Thought Possible by Short (2015), the author identifies several risks to be aware of in the years prior to selling your business.
- Economic Risks Timing: 1) economic uncertainty, 2) buyers hard to find, 3) exorbitant up-front fees from investment bankers, auditors, etc., and 4) seller expects an unrealistic selling price.
- Personal Risks Timing: 1) family dynamic in business, 2) owners mentally checkout and don’t mind the store, and 3) disillusion of DIY in M&A transaction.
- Business Risks Timing: 1) an unsustainable significant structural change in the organization, 2) loss of employees, customers, suppliers, etc.
How to create favorable conditions to reduce risk in exit timing.
The Triple Bottom Line Succession (3BLS) best fits into the Triple Timing (3T).
On the left of the graphic above, you see the Triple Bottom Line Succession (3BLS) that includes these stakeholders: 1) employees 2) customers and 3) investors. On the right side, you’ll see the Triple Timing (3T): 1) economic 2) business and 3) owners. Succession is no longer a secrete affair of the owners; you can see that all stakeholders are identified here, including the family.
For example, John (not his real name) started succession planning 10 years prior to his desirable retirement age of 65. John and his partner Mary (not her real name) identified potential internal candidates if they chose the internal transfer method of management buy-out. Both John and Mary (not husband and wife team or family) bought their current business from a previous partner about 15 years ago. They are in the professional service industry.
They know there is potential for a 3rd party buy out. My team first helped John and Mary identify a viable business model (Customer Succession) to ensure their competitive advantage continues to stay ahead of industry innovation and benchmarks.
Second, we put two candidates, Ben and Judy (not their real names) as part of the Key Management Team (KMT or Employee Succession team) and started the grooming process. Since we didn’t know if John and Mary would sell to a 3rd party or not, it made no sense to talk about a transfer with Ben and Judy, as long as the business could run with or without John and Mary. We did not want to set the wrong expectations.
Third, we started working on the profitability benchmark and intellectual property build-up to further increase the business equity value positioning for future investor succession. Both John and Mary, with our help, effectively reduced all 3T risks to a minimum, over time.
I agree with savvy professional investors who say you can’t really time buying or selling your stocks. But I do believe you can certainly reduce the risk and enhance your odds of winning when you transition out of your business using the 3BLS and 3T models. Just as John and Mary proactively looked at their business as an investment and implemented timely implement succession strategies, so can you.
Contact my team at Value Growth Institute for more information about Triple Bottom Line and Timing strategies, and get started today on the right business transition plan for you. Schedule an appointment today!
Koropp, C., Grichnik, D., & Gygax, A. (2013). Succession Financing in Family Firms. Small Business Economics 41(2), 315-334. doi:10.1007/s11187-012-9442-z
Short, K. (2015). Sell Your Business for an Outrageous Price: An Insider’s Guide to Getting More Than You Ever Thought Possible. New York, New York: AMACOM.
Slee, R. (2011). Private capital markets valuation, capitalization, and transfer of private business interests (2nd ed.). Hoboken, N.J.: Wiley.