It's clear the owner of a closely-held business is ready to make and keep a decision about a sale or liquidity event if they've thought through four personal and four corporate priorities, says Aegis Advisors Founder & Principal Fred Vorys.
The four personal priorities are:
- Their career plan: What are they doing now and what do they want to do next?
- Avocation plan: kids, grandkids, charities, travel, golf, etc.
- The estate plan: Will the members of your family and others end up with the dollars that you want them to while minimizing the government share of that?
- The wealth plan: the amount of wealth and liquidity you and your family need to live in the manner that you want.
The four corporate priorities are:
- The strategic plan of the business. This strategy is going to determine the growth and the exit of the business.
- The capital plan of the business and the search for adding smart money to your company to help you through its growth and then the exit.
- The management succession plan: Who are the key players in management? Are they motivated to help you build value and sell value? And how will the buyer view them?
- The shareholder liquidity plan.
Vorys says surveys have shown that as many as 75 percent of those who sold their companies regretted doing the sale. Their reasons typically weren't financial but rather not being emotionally ready to leave the business.
"If you don't want to be part of the 75 percent, you really need to understand the pluses and minuses of all your different alternatives in getting liquidity because once you sell the business, it's very rare that you're going to be able to get it back," he says.
Oxer Capital, Inc. Founding Partner Dan Phlegar says if an owner has not thought through their reasons for selling — if there's any kink in the armor — it shows up when they're doing the transaction.
"We ask these types of questions, trying to understand why? What's the use of capital and does it match the reasons, and are the reasons something valid?" Phlegar says. "We hear some of the things that have just been said on this panel and we sometimes question them. It's almost like they have to come up with a reason as opposed they've actually got a well-defined reason. So, whenever somebody's stumbling through the process with us, it really becomes pretty clear."
BMO Middle Market M&A Managing Director Lowell Jacobson says much of the sale decision is related to the owners personal career path. And what the owner wants to accomplish determines the path forward. For instance, it could mean selling a minority interest to private equity in order to add capital, increase the corporate risk tolerance and more progressively pursue a growth strategy. Or it could mean selling outright to pursue other interests.
"A lot of it is, do I want to spend more time at work or do I want to think about spending less time at work?" Jacobson says.
Then there's the view from a purely business perspective, knowing when it's time for a liquidity event. Those signs can include financial trends pointing in a positive direction, having the right management team, eliminating add-backs, and making, or at least being on a path toward, operational improvements that can enhance margin and drive operational efficiency, and more.
Vorys, Phlegar and Jacobson, along with Tiller Corporation's Steven Sauer, spoke at last year's Columbus Smart Business Dealmakers Conference about the decision making that preceeds a liquidity event. Hit play on the video to catch the full panel discussion.