THE PERFECT BUSINESS EXIT STRATEGY

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Editor’s note: This article was posted in the Internet by: Delta Business Services, a small business acquisitions firm that has positioned itself as the preferred business buyer from retiring business owners who want to sell but see the exit process as painful.

The Business Thinker, llc (www.BusinessThinker.com) assumes no responsibility on the views, conclusions or recommendations made or inferred to by the authors in this article. 

Imagine being able to sell your business in a way that will ensure that you create a stream of income that you will never outlive, and on which you will not be taxed.

These are exactly the kinds of benefits that business owners who choose The Delta SolutionTM receive.

Founded by Heath Frantzen, Delta Business Services formulates its business exit strategies on the recognition of the convergence of three irresistible market forces. These market forces are set to fundamentally change the small business marketplace forever.

Market Forces

  • “The Boomer Wave”There are an estimated 7 million Boomer-owned businesses whose owners are seeking an exit from business ownership into retirement.
  • We are experiencing unprecedented low interest rates combined with exceptionally tight credit standards.
  • Tax policies are shifting and transaction costs are increasing, both of which have greatly reduced sales proceeds upon exit.

Exiting Gracefully…Can It Be Done?

  • ?  Baby Boomers: They are retiring in waves, many of which are business owners lacking viable exit strategies. Due to the volatility in financial markets, traditional retirement methods are falling far short of providing necessary resources to ensure a stress-free retirement. Finding safe havens for cash these days is becoming more and more difficult.
  • ?  Worries About Burn Out and Missing Your “Golden Years”: Boomer owners are often tired of the day-to-day demands of running a business. They become burned out as a result of having unmet expectations from business ownership. Many feel trapped by their business—a business that was intended to give them freedom—but instead tied them down. They want to sell, but worry about things such as capital gains taxes and having enough money for their “golden years.” Some have the nagging worry that they will outlive their retirement funds or be required to downwardly adjust their lifestyles in retirement.

?  Second Generations Taking Over Businesses: “Baby-Boomer” business owners typically have “Generation Y” children as their heirs. These heirs may not be prepared to take over their parents’ business. In fact, many don’t even have an interest in taking over the business.

  • ?  Inheritance Concerns: That being the case, most owners still want to bequeath their heirs something other than the business, and would like the ability to plan for and possibly control that inheritance.
  • ?  The Downside of Dealing With Brokers: When Boomer owners look into to the possibility of selling however, they quickly determine that listing their company with a business broker is unappealing due to their reputations for high cost and lackluster performance. Selling via a broker is often an expensive, risky, and unpleasant proposition. In fact:Eighty-seven percent (87%) of small businesses listed for sale in America never sell at all.1 In most scenarios, businesses sell only after being on the market foryears, the vast majority at substantially discounted prices. Even then, 3 out of every 4 of these acquisitions fail. Shutting the company down isn’t practical and owners want to see their “babies” continue on with competent leadership. In short, sellers have a 3% chance of a successful exit.2
  • ?  Credit Restrictions and the Capital Gap: The recent tightening of credit standards and the No Man’s Land of the capital gap for small and mid-market businesses has exacerbated the already limited pool of prospective buyers. Those wealthy enough to purchase tend to not be interested in any but the most profitable, mid-market and turn-key businesses. They rarely buy, and even then only at terms under which financial institutions are unwilling to lend, and at prices sellers are unwilling to accept.
  • ?  Lack of Qualified Buyers: Due to the Baby Bustthat came after them, Boomers now must contend with highly unfavorable demographics when they decide to retire and sell their businesses. The dilemma is simple: there just isn’t a large enough pool of potential buyers who have the skills and tools needed to buy and successfully run a business. There are too few qualified buyers for too many businesses. This exacerbates the situation where only 13% of businesses for sale ever sell, and 3 out of 4 of these sales fail. Sellers only have a 3% shot at success.3
  • ?  Interest Rate Challenges: To further complicate matters, we are experiencing historically low interest rates. This makes it very difficult for owners to reinvest their profits and get equitable retirement cash flow. 1, Keys to the Vault, How to Buy a Business, July, 2012
    2. Why Do So Many Mergers & Acquisitions Fail?, The Wharton School Press, cite: Robert Holthausen, Martin Sikora, and Harbir Singh, et al., March 2005
    3. Why Do So Many Mergers & Acquisitions Fail?, The Wharton School Press, cite: Robert Holthausen, Martin Sikora, and Harbir Singh, et al., March 2005
  • ?  Added Fees and Taxes: For the 13% of deals that actually close, transaction costs are substantial. After broker commissions, professional fees, paying off liabilities and payables, along with capital gains taxes, most sellers walk away from their business with a valuation of barely 1 to 1.5 times their businesss annual profits, and practically no cash in pocket.
  • ?  Additional Considerations: Add to that ever-increasing taxes and inflation, epidemic lawsuits and estate planning confusion, and sellers have a storm of complexity that vexes even the savviest pre-retirees. America is in flux both economically and socially. In this new era, there will be huge changes in the ways we need to approach retirement.How to Sell Pain-Free, No Matter What the Economy is Doing: After multiple acquisition endeavors, Mr. Frantzen saw the difficulties present in the current marketplace that were preventing more owners from selling their businesses. He developed The Delta SolutionTM in response to the pain in the marketplace. Upon seeing and hearing the frustration retirees face, Frantzen realized that Boomer sellers were left with two unpalatable options:
    1. Work until they die.
    2. Substantially reduce their lifestyles.

    After analyzing the reasons for this situation, Frantzen formulated his “Delta Solution”TM

    In any transaction there are primarily three components that drive the deal: Cash, Terms and Risk. By analyzing the interdependencies of these fundamental components, it became clear that the key issue making it almost impossible to sell in this market was risk.

    Market risk prevents potential buyers from buying these businesses with no guarantee of future income. It is default risk that banks are unwilling to take, so they often are unwilling to make loans.

    Sellers fear operational risk fueled by their uncertainty about a buyer’s capability to successfully navigate business operations.

    Such fears of risk and uncertainty about the future end up forcing Boomer owners to stay in business, even when they know the time is right to sell.

    When faced with anemic returns from their re-invested proceeds, the risk of a buyer’s potential for default (which tends to push a seller to demand more cash up front), and the fear of outliving their cash savings, it is little wonder that many sellers are opting to work longer and harder in their businesses when they would truly rather retire. Many business owners feel imprisoned by their businesses, with no idea how to escape.

 

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