Why One is Crucial to the Other

In the last post, we discussed preparing your company for sale in advance of a transaction. Advance preparation includes financial planning. What does financial planning have to do with selling your company?

The answer: A lot!

Business owners are encouraged to consider their entire personal financial situation when considering the sale of their company. Often the value of the business is the owner’s single largest asset. Understanding how much money the business owner needs to realize from the sale of the business and how they derived this number is critical. Is the number based on a gut feel? Is it based on the “Country Club Effect”, i.e., the sale value of their buddy’s business? Or is it based on a careful analysis of a variety of personal factors? The financial planner and investment banker can work together to help the business owner address this extremely important question.

What if the business owner learned that they can realize all of their objectives based on the current value of the business? Or learned that they are very close to achieving their objectives based on the current value of the business? Or learned that they are not close to achieving their objectives based on the current value of the business.
The answer is that the business owner can now make decisions and take action based on knowledge.
In the first instance, the business owner has the luxury of deciding when to sell the business. In the second instance, the business owner can develop a short-term action plan to increase business value. In the last instance, the business owner can develop a long-term action plan to increase business value. In each instance, the business owner can act based on a well considered analysis.

It is interesting to observe that the required business value for two companies, identical in all respects, may be different based on the circumstances, needs, and objectives of the business owners. What does this mean? Circumstances, needs, and objectives include lifestyle, age, health, and desired retirement age. There is no right or wrong answer to these questions; however, the answers can have a dramatic impact on the required sale value to achieve the business owner’s objectives.

Other circumstances, needs, and objectives can include how much of the business owner’s net worth is represented by the value of the company? Does the business owner want to work post closing and for how long? Does the business owner have certain high cost special interests (e.g., hobbies or travel)?
And does the business owner have philanthropic interests, special needs family members, or elder care considerations? All of these factors impact the required sale value of the company. Finally, the value of the business can be impacted by the type of buyer, i.e., management, a financial buyer, or a strategic buyer. The business owner may need to decide the type of buyer that they would like to continue their legacy, but this decision can also have an impact on the business value and ability and timing to achieve their objectives. Again, by considering these factors, the business owner can make decisions based on knowledge.

Financial planning can be influential in the sale process, but only if the planning is undertaken in advance and used as a critical input in the process. Financial planning helps to determine the business owner’s cash flow requirements to achieve their objectives which determine the required minimum pre-tax and after-tax proceeds from the sale of the business.

Business owners want to know the ROI from investing in the financial planning process. The answer to the question is simple: the business owner
can confidently enter into a sale process when the stars are aligned and can proceed with the sale process with confidence that a completed transaction will achieve their objectives.
Being knowledgeable about needs in advance of a sale process also increases the likelihood that the business owner will follow through with the sale. Learning mid-process that the transaction falls short of objectives is a waste of valuable resources and will likely result in “seller’s remorse” and a costly busted deal.