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Joan M. Ridley
Pres., CFP™, CEPA, CBI


2911 Turtle Creek Blvd., Suite 300
Dallas, Texas 75219


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PHONE: 214.692.9192
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Why Biz Pre Sale Prep Takes So Long

By
Joan Ridley, CFP™, CEPA, CBI

Business owners are often surprised to learn how long it takes to prepare a business for sale. It's a complicated process, so we'll focus only on the highlights. This will give you an idea of why it takes so long. You might be wondering if this process applies to your type of business. If you are looking to build your personal net worth to fund your retirement with the invested sales proceeds, and, if selling for top dollar is important to you, keep reading. To help you get your bearings, this article is written from the standpoint of a Certified Exit Planning Advisor (CEPA) and business consultancy.

Phase I: Determine how much you need or want to net from the sale

This is the diagnostic phase where the CEPA finds out where you are now, where you wish to go, how much money it will take to get you there, and the basics about what could stand in your way, either personal or business.

Here is the data the CEPA gathers:
  • Personal lifetime cash flow projection including the net sale proceeds
  • Analysis of the current salability of your business
  • Summary or abbreviated business valuation
Phase I will reveal the following and more:
  • If there will be a gap between what you will need or want and what you will have
  • If you will have more than you need and will have an estate tax liability
  • Areas that need to be addressed to reach your goals
  • Risks that could stand in your way
  • The amount of taxes you will pay when you exit

Time to complete Phase I: 30 to 90 days, depending on how long it takes the business owner and his other advisors to gather the information requested by the CEPA

Phase II: Implement the areas that Phase I revealed that need attention

There are actually two parts to Phase II, although most business owners will not need or want to proceed to Part II. The focus of Part I is on what some call "deferred maintenance". Let's use a simple analysis. If you were planning to sell your home, your Realtor ® would advise you to repair the leaky faucets, paint the shutters, paint the interior and buy new carpet (neutral colors, of course), spruce up the yard, and even tend to more involved fixes such as water-proofing and painting your water-stained basement. These are items that you have neglected, either intentionally or unintentionally. To a buyer, these aspects would look like additional costs to be dealt with at his expense, post-sale. So, a prudent would address all these issues before placing the home on the market. Otherwise, he will receive no offers, or, none that will net him enough to move forward with his post-sale plans.

To continue with our real estate analogy, Part II can be likened to making significant changes to your home that will add considerable value. A few examples are adding rooms, moving walls, and expanding and totally remodeling the kitchen.

Part I focuses on improving the basics in your business and risks that could stand in your way. Here is a non-exhaustive list:
  • Financials: a) record-keeping b) performance
  • Sales and Marketing: a) performance b) compensation c) accountability d) strategy
  • Employees and Management: a) hiring b) performance c) accountability d) compensation e) retention
  • Products and Services: a) profitability b) competition d) diversification e) uniqueness f) risks
  • Processes: a) efficiencies b) owner-dependence c) uniqueness
  • Strategy: a) documentation b) communication c) agreement d) tie in
  • Stakeholder Motivation: a) education/awareness/understanding b) commitment c) conflict
  • Owner-dependence
Other Risks to be Addressed in Part I

There are several risks that could derail the sales process that need to be addressed in Phase II, Part I:

  • Lack of proper, current estate planning for estate tax reduction and incapacitation
  • Lack of collaborative spirit, expertise, and experience of current and new advisors
  • Lack of understanding of the exit planning process and the roles of those involved
  • Lack of willingness and commitment of business owner to work collaboratively with the exit planner and the seller's other trusted advisors to keep the process moving forward

Time to Complete Phase II, Part I: Usually 12 to 24 months

There will be some overlap between Part I and Part II. However, unless the stakeholders have a long range goal of very significant strategic growth in value, most business owners' goals in the lower mid- market can be achieved by addressing the areas in Part I. They focus on reducing risks that render the business either unsalable, or, not salable at a price and terms that could easily be achieved with those changes. One thing is certain, it would be unwise to move on to Part II before thoroughly addressing the issues in Part I. All systems in Part I must be in place and running smoothly before expanding the business.

Part II can include items on this short list:
  • Acquisition of other companies
  • Acquisition of new territories
  • Acquisition of new product lines or services
  • Acquisition of new properties such as patents
  • Acquisition of new processes

These drastic changes, are often funded with debt or equity, whereas the "deferred maintenance" projects in phase I are usually funded from cash flow.

Time to Complete Phase II, Part II: Depends on which growth strategy is implemented. However, it could take less time to implement Part II than Part I.

A Word About Lifestyle Businesses

You might be thinking, "this is an over-kill for my business" and you might be right. Business exit planning for smaller lifestyle businesses is different than exit planning for wealth builder businesses. To find out which one you have, read What Kind of Business Owner Are You. There are other options for you. If you are a lifestyle business owner and want to become a business wealth builder owner keep reading The Most Important Business Decision you Will Ever Make.

Why Pre-Sale Planning is So Important

There are actually several reasons why pre-sale planning is so important:

  • Your never know when you will leave your business involuntarily. In that event, pre-sale planning protects your family, employees and customers.
  • You want to be prepared for that once-in-a-lifetime buyer who might show up unsolicited. "He" won't hang around while you take care of deferred maintenance, and, " he" won't be interested in your explanation of how great your business could be.
  • You need to be ready for the next up-swing in the market before sellers exceed buyers.

In a healthy economy, only 30% of businesses sell and go to closing. Make that 20% in the current market. Why do they fail? According to an extensive study done by Price WaterhouseCoopers, "the # 1 reason deals fail is lack of pre-sale planning". It takes 15 to 24 to prepare to exit and another 6 to 18 months to identify a buyer, negotiate, and close the transaction. Decide when you want to be out and give us a call. Call us today at 214-692-9192 for a complimentary visit to see how you can start planning for your next big adventure.


Joan M. Ridley is a Certified Financial Planner™, a Certified Exit Planning Advisor, and a Certified Business Intermediary, and President of Business Wealth Solutions, a business consultancy that helps business owners improve their top line, bottom line and present their financials to best showcase company performance. When you are ready, we have the conversation about what comes next and what you have to do to get there. Call 214-692-9192 to learn more and visit www.bwsllc.net.

Copyright 2012 Joan M. Ridley

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