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Value Building: The Crisis Vaccination

Submitted by John Brown on Fri, 06/05/2020 - 8:34am
forever owner

The COVID Pandemic crisis has affected us all in different ways. There are still many business owners out there who do not want to sell, even though in two previous posts, we suggested that:

  1. Having survived the Great Recession (Strike 1), the COVID crisis (Strike 2) will persuade some owners, especially boomers, to exit their companies before Strike 3—the next unforeseeable economic downturn.
  2. A quarter of all owners who decide to continue to own their businesses do not wish to “exit” their employment. They plan to retain ownership because they like the thought of owning a business more than selling it.

Last week, we highlighted one reason why business owners may not want to sell their business, even after the current pandemic we are in. In this week’s blog post, we discuss the second reason why owners may choose to remain owners; namely some owners need or want the income that their recession-resistant companies provide. These owners realize that whenever they sell, they will have to live on the income generated from the proceeds of the sale. They understand that if they sell their companies today, they won’t receive nearly as much income. Under those conditions, why not retain ownership? That’s the question fictional owner Francesco Buttone asked and answered when the COVID crisis hit.

Why Sell?

At 50-years old, Francesco Buttone owned a business that had recently been valued at $2.5M, using a 5x EBITDA multiple of its annual cash flow of $500,000. Francesco's annual compensation, with perks, was $300,000.

Following the Great Recession, Francesco was determined to develop a recession-resistant company. The Recession had revealed several weaknesses in Francesco’s business: 1) an over-reliance on Francesco for new business, 2) top-heavy customer concentration (six customers generated 70% of revenue) that delivered a serious blow when half of them disappeared; and 3) inefficient and paper-based financial and ordering systems.

To address these weaknesses, Francesco and his advisors focused their attention on strengthening the company’s value drivers. His advisors recommended that Francesco:

  1. Install state-of-the-art operating systems.
  2. Diversify the customer base by increasing the size of his sales staff and revamp the incentive program. They advised this program provide a greater reward for bringing in new customers than for new business from existing customers.
  3. Hire and develop a capable, motivated management team that could manage the company without his presence in the company every day.

Eventually Francesco’s involvement was limited to participating in strategic decisions and customer relationships with a few larger, long-time accounts.

When the COVID crisis hit, Francesco never thought of selling because he knew his business would survive. He also did not want to sell because he knew if he sold the company, his salary would end, its cash flow of $500,000 would no longer be his and the income stream from the net proceeds of the sale would generate less than $100,000 annually.

For Francesco, it was a no-brainer:  Ride out the COVID Pandemic or whatever downturn the economy would throw at him.

Even though revenues would suffer during the COVID crisis and through the recovery period, Francesco’s business was solid. He might choose to spend more time in the business, but he did not have to. The plan to install and enhance value drivers that he and his advisors implemented years ago gave Francesco the option of spending only as much time in the business as he desired.

Takeaways

  • Meet with your clients; determine what’s behind their desire to stay or leave their companies. Direct your efforts and recommendations to achieving their exit objectives.
  • During and after the COVID crisis businesses are ideal candidates for value-building discussions and planning. Talk to your owner-clients today about how you can help them minimize the effect of future downturns.
  • Owners who don’t want to sell are great Exit Planning clients.


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