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Business Value

How to get the most for your business

Meet Mr. And Mrs. Business Owner

Meet George and his wife, Georgia, typical entrepreneurs. George has: (1) served his country with distinction in a war or peacetime military; (2) received some college education on the G.I. Bill; and (3) has either grown the business from Ground Zero, or inherited a business that has been in his family for generations. Typically, George is a strong operations person, often with a love for the technology and/or details of his business’ day-to-day operations, and one of its best salespersons. Predictably, George and/or Georgia, are the driving force(s) behind the business and have built a company that is such a reflection of their personalities that it is virtually inseparable from them.

Like many business owners, George and Georgia have spent most of their lives building their business, with most of their time spent on tactical concerns. The limited amount of time they have available for strategic thinking/planning has been focused on growth initiatives, and, in possibly as much as a third of the cases, they have planned for succession in the event of their demise. Interestingly enough, according to a recent study by the Family Firm Institute (“FFI”), almost 20% of senior family business shareholders are not confident of the next generation’s commitment to, or ability to run their business, yet 25% have not completed any estate planning other than writing a Will. FFI’s study also stated that, in the next five years, over 39% of all closely-held and/or family-owned businesses will lose their primary owner to death or retirement. With this lack of planning, is it any wonder that, while more than 30% of all family businesses survive into the second generation, only 3% survive past the third generation.

Having reached the time in their lives when they want to begin enjoying the fruits of their labors and reduce their day-to-day involvement, George and Georgia, who have planned every day of their business lives down to the second, find themselves looking at divesting themselves of an asset that probably represents more than two-thirds of the value of their total net worth, and, for the first time in their lives, they have no plan. Accustomed to success in business, George and Georgia begin to make decisions about their exit strategy, in many cases without consulting with any of their professional advisors. Interestingly, the same business owners who would not consider running the risk of an Internal Revenue Service audit by doing their own tax planning and possibly owing tens of thousands of dollars of additional taxes, confidently move forward as ‘do it yourself’ mergers and acquisitions candidates’ where millions of dollars are at stake. Without experienced professionals who have been through the process enough times to develop the expertise to avoid the pitfalls, George and Georgia begin to make mistakes.

Here are some examples of classic mistakes business owners make when trying to go it alone:

  1. Selling their business for far less than it is really worth, or on terms that are extremely unfavorable.
  2. Failing to highlight the true, recast profitability of the business for the buyer.
  3. Releasing confidential financial and operating information, including client lists, to current or would-be competitors that those entities can subsequently use to the seller’s disadvantage in the marketplace.
  4. Negotiating with buyers who do not have the financial or operating ability to acquire and run their business.
  5. Taking their eye off running their business and allowing its value to erode, while they are entertaining a sale.

Surprisingly enough, even in today’s age of highly educated business owners and professional advisors, such mistakes are fairly typical, as well as countless others.