As business owners reach retirement age and exit their business, there are several transition options available. A younger family member may be willing and able to take over the business. If not, the business could be transitioned to the management team or sold to the employees through an Employee Stock Ownership Program (ESOP). The business could also be sold to a strategic or financial buyer. Photo: Stocked House Studio – stock.adobe.com
The horticulture industry has been rocked by the closure of several major growers in the past year. A few could have been avoided with proper succession and exit planning. Several didn’t plan, and for others, it was too late, or the land was worth more than the business. Ben Franklin said it best, “If you fail to plan, you are planning to fail.”
The one indisputable fact is that 100% of owners will exit their business. According to the Exit Planning Institute (EPI), 50% of exits in the U.S. are involuntary due to death, divorce, disability, distress, or disagreement. We call that exit by chance, and frankly, it isn’t ideal. The best way to step away from your business is by choice; to be pulled toward something that makes your decision to exit an exciting and fulfilling next chapter. Creating a plan makes it possible for your business, your team, and your customers to continue to thrive, and that is ideal.
There are a number of options available as you plan for a successful exit. Family succession is great, but what if the next generation isn’t prepared or doesn’t want the business? What if there is no family to take over the reins? The next-best choices are transitioning the business to your management team or selling to your employees through an Employee Stock Ownership Program (ESOP). You might consider selling the business to a strategic or financial buyer. Lastly, and likely the least lucrative, is closing and liquidating the business. Since a company can often represent 80% to 90% of an owner’s net worth, it’s best to focus on the wealth-saving and positive options of family succession or selling the business.
The Silver Tsunami
Between 2019 and 2029, the Small Business Administration (SBA) estimates more than 10 million businesses will change hands. According to EPI’s 2023 National State of Owner Readiness Report, this is a $14 trillion tsunami, with 75% of business owners likely to exit in the next 10 years. That means more sellers than buyers, and only the best will sell.
Furthermore, 80% of these businesses are not saleable or do not have the proper talent or family pipeline to continue. Of the remaining 20%, 12% will sell for less than the original asking price.
According to the EPI report, succession and exit planning has become a hot topic amongst business owners. Sixty percent of owners have creating an exit strategy on their priority list (up from 6% just 10 years ago), and for 36%, it is their top priority.
Being Transition Ready
Succession and exit planning is good business planning. It is also a team sport that involves your financial planner, accountant, lawyer, and often a Certified Exit Plan Advisor (CEPA) to quarterback the process. We have been part of several successful transitions in the green industry. The most successful transition plans focus on building value and include a business valuation — you have to know your numbers — and assessment of personal, financial, and business readiness.
“Transition Ready” means you’re legally, financially, and most importantly, emotionally ready. From our experience, especially with family businesses, we understand how emotionally charged and challenging it can be. In fact, according to EPI, 75% of business owners who sell their business profoundly regret it within a year after the sale.
Chip Conley, founder of the Modern Elder Academy, states, “We need to stop retiring from something and retire to something. There are three values people take from their company ownership — a sense of purpose, wellness, and community. They seemingly lose all three when they retire, and it can accelerate their mortality by several years.” Some can walk away, but many can’t. Perhaps an earn-out or a situation where you ease out of the business is right for you.
Stephen Covey, author of “The 7 Habits of Highly Effective People,” once said, “Begin with the end in mind.” The Freedom Point is when the sale of your business, investments, and retirement funds can cover outstanding debt and generate enough cash to sustain your lifestyle for the rest of your life. Having a will and engaging in estate planning are critical elements of a financial and personal plan. According to EPI, only 30% of owners have a written estate plan, and only 24% have a written and updated will. The business could be 80% to 90% of an owner’s net worth, so financial readiness is critical.
Transition-Ready Businesses Are More Valuable
Building the value of the business is an ideal time for the owner to switch gears, have fun optimizing the business for a sale, and pouring energy into the planning. According to Rick Krebs, merger and acquisition expert, PivotPoint Partner, and author of “Sell Your Business By Design Not By Default,” “Exit planning causes an exponential increase in business value, not a linear increase. There is very little downside to exit planning as the owner creates more value and a better run business.” Having fun making the leap from working in your business to working on your business is a great antidote for regret. This is where a trusted CEPA can keep you focused and be your sounding board. It is also critical to have your team of advisors on the same page to ensure you are financially and legally ready.
As the Boomer generation continues to retire, a glut of companies will be transitioning or selling. The pandemic and current economic concerns have also accelerated this trend. Focus on becoming transition-ready and driving value in your business. You can then plan to finish strong with a clean and mutually beneficial transition to a new owner. Remember, 100% of owners will eventually have to exit their business. It’s time for you to plan and prepare for one of the biggest transactions of your life on your terms. What is your end game?
How to Increase the Value of Your Business
Operational discipline, financial strength, and adopting a buyer’s perspective on your business all point to a higher return on your investment. Let’s look at “value builders” that increase the valuation of your business and make it infinitely more valuable in the eyes of an internal successor or outside buyer.
- Financials and Cash Flow: Overall sales and profitability — revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization). Well-prepared financials and key performance metrics with predictable and reliable cash flow (ratios, receivables, and banking situation). Articulate how cash moves through your company — are you a cash spigot or a cash drain?
- Business Independence: Your independence from customers (are sales highly concentrated with a few accounts, or do you have a healthy spread), employees (who would create a disaster scenario if they left, and do you have a retention plan and a bench), and suppliers (are we too reliant on just a few).
- Control of the Market: Are there barriers to entry? Do you have a differentiated market position, or are you commoditized? Do you have a unique product/variety or high level of service? If what you sell is not unique, look at how you market and sell it. Buyers are looking for barriers to entry for potential competitors and the ability to control margin, which means more for sales and marketing.
- Presence of Recurring Revenue: Consumables, which are usually present in a growing operation; loyalty and subscriptions; sunk money, long-term contracts, maintenance or recurring purchases; and lease revenue.
- Customer Satisfaction: How satisfied are your customers? One grower told us customers were 100% satisfied, but when we asked for the data, it didn’t exist. It was his opinion. Satisfaction needs to be quantified and measured via surveys. What is your reputation in the industry? Are you staying on top of trends? Your website, e-commerce, email lists, and social media are critical for today’s grower.
- Growth Planning: What is the future potential of the business? A buyer doesn’t want to buy a company in decline. The day they buy your business is their first day, and they want to know there is still field left to plow. Is the business scalable? Do you have a five-year growth plan? You may not be around to see it happen, but it has value to a buyer.
- Owner Independence: A top issue we see in the green industry is, can the business operate independent of the owner? Workaholics are bad bets for a potential buyer. An owner who has all of the key relationships and is responsible for a majority of sales, especially to larger customers, is a value killer.
- The Intangibles — “The 4 Cs”: Human Capital (the measure of talent on your team and in key management), Customer Capital (too much concentration and are customer relationships spread out amongst your staff), Structural Capital (Do you have up-to-date systems, and are your processes and procedures efficient? Is the information readily available?), and Social Capital (your culture).
You need to optimize and accelerate the value of your business before a sale or transition and understand that effective succession planning is more than transitioning to new leadership. By taking an investor’s approach to your business, you can begin to address the risk to a potential buyer as well as identify the potentially high return on investment (ROI). Increasing the value of your business is a process that could take several years, so it is never too early to start.
Succession Planning Survey
PivotPoint Business Solutions is conducting the State of Succession and Exit Planning in the Horticultural Industry Survey. Click here to take the survey.
