Use the Interim Time Between Now and the Future Sale of a Business to Wisely Prepare
Is business ownership a binary thing? Do we either own our businesses or not? I’ve mentioned this concept before. The binary notion leads business owners to think either in terms of the status quo or of an eventual sale of the business.
The truth is that between the two bookends of status quo and an eventual third-party sale are many possibilities for creating shareholder liquidity and diversification and facilitating both ownership and management transitions. I call this time interim time. The literal translation of “interim” from the original Latin means, “the time between.” Interim time, then, is the time between now, or the current status quo of a business, and an ultimate sale of that business. Let’s look at the bookends:
- Status Quo. First, let’s talk about the either. The status quo may be an excellent strategy. If sales and earnings are rising, existing owners can benefit from the growth and expected appreciation in value and maintain control of the business. However, the status quo, in many instances, does not provide liquidity and diversification opportunities for owners and places all execution risk on them. A decision to maintain the status quo for your business may not do much to advance necessary ownership and management transitions, as well. A decision to maintain the status quo should be based on conscious decision making and not on procrastination. And the status quo has an insidious side to it – unless you and the other owners do something, you will stay in the status quo for a long, long time; therefore, you have to question the status quo on an ongoing basis.
- Ultimate Third-Party Sale. Now, let’s talk about the or. If your business is continuing in a status quo mode, chances are you are not preparing it for an eventual sale. After all, it will happen someday, but not in the foreseeable future. Chances are also that you and the other owners may not be preparing yourselves for an eventual sale. And if you are maintaining a status quo status, you may not be able to influence the timing of an eventual sale. The ideal time to sell a business is when the markets are hot, when financing is readily available, when your business is tracking upward and has a good outlook, and when the owners are ready. In reality, what you can hope to achieve in a sale of your business is the best pricing available in the market at the time of the sale. If you remain in the status quo, you may not get to choose the timing of the eventual sale.
If it seems like I am painting an eventual third party sale as an unfavorable outcome, I am not. It can result in an unfavorable outcome, however, if your business is not ready for sale at the given time and if you and your other owners are not ready, personally, for that eventual sale.
What to Do in the Interim Time
Managing illiquid, private wealth in private businesses is far more than running the businesses themselves. We all have to manage our businesses. Managing the wealth in our businesses requires a much more active role for business owners and often a different level of attention on the business itself.
The status quo and an eventual third-party sale are, indeed, bookends. Consider the table on the next page.