Smooth transitions don’t occur all at once. If you have a certain vision for your future, like anything in life, you’ll need to make the necessary plans and arrangements in order to realize your goals.
Whether you plan on ‘cashing out’ of the business completely, or would prefer to gradually relinquish day-to-day duties for a more strategic role in the direction of the business, those who prepare are always more successful than those who don’t.
In my experience as an investment banker, what I often see are owners who have built up capital only to hand it over to the next generation without taking any action regarding liquidity. Unfortunately, when a business owner takes a ‘till death do we part’ strategy it’s often a catalyst for the demise of a company. For more than 18 years, Allegiance Capital has assisted business owners by providing them with a variety of liquidity options and courses of action that may solidify their business’s future.
“I never worry about action, but only inaction.”
More and more we are making use of non-traditional avenues to accomplish generational transitions, especially by introducing a family office strategy. The private equity option carries the stigma of the need to flip the business in 5 years, but a family office tends to come in with the plan of holding a company indefinitely. In this scenario, business owners have the support of the family office in securing the wealth, diversifying holdings, and providing the second generation with the right partner to help them grow the business.
I recently worked with a 76-year-old owner who had no interest in quitting the business. I explained to the owner that should something happen to him, without any preparation or transition period, his business could very well disappear. I recommended a progressive succession plan with the involvement of a family office. As a result, he could continue being involved in the strategic direction of the business without the need to work 7 days a week. At Allegiance, our specialty is helping you choose a partner who will support the way you run your business through this gradual transition. Ultimately, we are able to help owners ride off into the sunset knowing they did right by their family, business and employees.
Whether you are interested in a partial or outright sale, this is the time to ‘saddle up,’ so to speak, because current supply and demand factors are boosting company valuations.
Factors Fueling Today’s Seller’s Market:
- In the last five years, more capital has been raised by private equity groups than they have been able to put to work in the marketplace.
- Because a limited number of companies are coming to the table to sell, buyers are hungry for quality businesses, resulting in a competitive marketplace for good deals.
- Senior debt and other forms of capital are relatively inexpensive and available, so banks are lending at 3.5 times cash flow.
- While interest rates are rising, they are still at historical lows – near zero.
One of the things I try to communicate often to my clients and colleagues is that business owners who try to time the market and take the last dollar are almost always late. If you miss today’s seller’s market, you’ll have to wait out the 5-6 years it takes for the pendulum to swing back the other way. The time to sell a business is when you have a good outlook and performance; buyers want to buy something while there is still ‘meat on the bone.’ As baby boomers start bringing more and more businesses to the market and economic factors change, the supply and demand equation will flip the other way and we will see a buyer’s market emerge. Again, those who prepare are always more successful than those who choose inaction.