InSight

Exit and Growth Strategies for Middle Market Businesses

Succession Planning – What is on the Mind of Today’s Small Business Owner?

By Patrick Powell | Jul 25, 2013

Money GraphIn the wake of the last recession, for most business owners the question is:  How many more recessions do I have left in me?  (i.e. How many more recessions can I personally stand?).  After all there is a toll beyond the financial challenges for most business owners.  It would be nice to know when the next recession is coming.  Naturally, we do not know.  So the next best questions is…”Where do I want to be when the next recession comes along?”

As most business owners know, a recession is no time to sell a business.  Especially when, like the last recession, the recession is accompanied by a banking liquidity crisis.

But what about now?  Has there been sufficient passage of time to return to normality?  In fact, all businesses respond to their own industrial cycles.  Some industries remain under significant strain from the past recession.  Others have already seen their businesses grow past pre-recession levels.  For example, if you are in commercial real estate or coal mining, your business may still be at historically low levels.  However, if you are in manufacturing related to the automotive industry, aerospace, or food products, you have likely experienced strength and growth in your business.

Here are some indicators to determine if your industry is in recovery or still in recession:

  • Are your sales and your competitors’ sales up to normal pre-recession levels?
  • Are your customers and competitors hiring new employees?
  • Are your customers or competitors implementing capital expenditures?
  • Are your customers or competitors able to borrow money from banks?

If the answer is “yes” to 3 out of 4 of the above questions, then chances are your industry is in recovery or growth.  Since it may take two years of preparation and dedicated effort to sell your business, you will want to factor in some lead time on your plan to sell your business.

Is it “retirement” or “risk management”?

We hear many business owners say they really don’t want to retire, but at this stage of their lives, they don’t want all of their personal wealth to be tied up in their business.

We hear entrepreneurs say that youth is wasted on the young.  Sometimes this sentiment is linked to the idea that once a business owner gains the experience and the mastery of his/her business model, it is often times too late to experience great risk.

Many business owners over 55 years old, have a high percentage of their personal wealth tied up in a closely held business.  Their advisors consequently raise concerns about risk and investment diversification.

“I have a growth strategy, which would be exciting to implement.  The problem is…many times excitement equals risk…a risk I am not willing to take at my age.” Anonymous Business Owner

Maybe it is debt risk or just capital risk.  Do you need to risk more capital on achieving your business growth strategy?   Is it possible to share the risk with a willing party and use their capital and share the rewards of success or the capital peril of failure?

That is the idea behind partnering with a private equity firm to implement your growth strategy.    

Many private equity firms will invest capital in a small business in exchange for equity for two purposes:

  • First, to allow the business owner to take money out of their business to achieve the owner’s personal wealth goals.
  • Next, to permit the business an opportunity to realize the growth strategy, which will increase the value of the business equity held by both the current business owner and the private equity fund investors.

In most cases, the private equity firms take a majority interest in the businesses in which they invest.  However, there are private equity firms who take a minority equity stake with certain controls (minority rights) in place.

If you are interested in learning more about these options for your business, contact your middle-market investment banker at Corporate Finance Associates.

 

7 Step Guide to Business Exit Planning

Posted by Patrick Powell.


One Response to “Succession Planning – What is on the Mind of Today’s Small Business Owner?”

  1. Great review of the decision making process and the role that private equity can play in providing an opportunity for business owners to “get some chips off the table” up front and get a “second bite of the apple” later.

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