What Could Possibly Go Wrong? The Seller with No Time

Last month, I addressed one of the two worst things we’ve seen happen in the M&A world.  In that article, I talked about the worst one: the buyer with no money.  In this installment, I’ll discuss the other awful situation we run quite often – the seller with no time.

The “seller with no time” story begins like this:

The owner has had his business for many years and has built up both a loyal customer base and a loyal cadre of employees.  In many ways, the business is his pride and joy.  Except for his nice home, the kids’ educations, and a few toys, just about every spare nickel has been reinvested in the business to make it better – to build a new facility, to take on a new product line, to invest in a new computer system.  He has a life insurance policy, but he hasn’t really created a separate IRA or 401(k) or any other retirement vehicle.  His business IS his retirement.

Not that retirement is a big deal.  He thinks about retirement from time to time, but it always feels to him that retirement is something to be done “later,” at some undefined point in the future.  Inevitably, though, something happens.  He could have a medical issue, or one of his friends could get seriously ill.  His family and friends may start bugging him to retire to Key West.  Or one day he may wake up to realize he’s pushing 70, or simply decide that the business just isn’t as fulfilling as it once was.  He decides to explore selling the business.  He meets with a financial advisor, who both helps him determine a target nest egg ($3 million, let’s say) and suggests that he enlist a business broker to help him sell the firm.

“On the face of it, we’re very happy to meet such a guy,” says Achim Neumann, President of A Neumann & Associates, a New Jersey-based M&A Advisory and Business Brokerage firm.  “He’s got a successful business, a good track record, and is motivated to sell fairly soon.”  So we begin to work with him to establish a value, obtaining a lot of information about the business and its financials, then “re-casting” the financial statements to determine the amount of “seller’s discretionary cash flow” the business is generating.  We provide the recasting to an independent valuation firm, and they come back with a fair market value.  Unfortunately, the fair market value is only $1.5 million.  Now what?

There are two variants to the “seller with no time” scenario.  In one, the seller decides to go through with the sale.  However, instead of retiring to Key West, they may have to retire near to their current home.  Instead of living a soft retirement after years of being responsible, they’re left with pinching pennies harder than ever.

In the other variant, the seller decides that he has no other choice than to continue working.  What caused him to want to retire – medical issues, family pressure, or a desire to just step back from the stress of owning a business – hasn’t gone away.  But now, he’s forced to go on, even though he doesn’t want to and it may not be good for him.  In some instances, we’ve seen people in physically demanding professions like construction be forced to continue with back-breaking tasks into their seventies.

So what could that business owner do?  “We tell all of our clients – and our prospective clients –  that it’s critical to obtain an independent business valuation at least 3 – 5 years before they would even contemplate retirement,” says Michael Gersten, Managing Director of A Neumann & Associates’ North Jersey Region.  “If you find out early enough that your business isn’t worth what you need to retire, you can take steps to fix it.  If you wait too long, you’re stuck between a rock and a hard place.”

“Many business owners balk when we tell them to get a valuation early – because it costs a little money,” says Gary Herviou, ANA’s Managing Director for Central New Jersey.  “But put in perspective, a professional valuation can cost only about one-quarter-of-one-percent of annual revenues – an insignificant drop in the bucket compared to the risk of being blindsided later.”

Steve Wrubleski, Managing Director for Southern New Jersey, puts it a little differently: “Not knowing what your business is worth is like not opening the envelope with your 401(k) report until the day you retire.  You may be in for a surprise – and not necessarily a pleasant one!”