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No one said it would be easy. If you are the owner of an interest in a business which has become profitable, you and your team have done something right and it probably was not easy. Moreover, it will not be easy to keep your business profitable.

What follows is a chart for the failure rate year by year from a LendingTree analysis of U.S. Bureau of Labor Statistics data (https://www.lendingtree.com/business/small/failure-rate/).

Time Frame	Percentage of Failure
Within 1 year	23.2%
After 2 years	32.8%
After 3 years	36.2%
After 4 years	43.2%
After 5 years	48.0%
After 6 years	52.9%
After 7 years	56.6%
After 8 years	59.6%
After 9 years	62.2%
After 10 years	65.3%

The five- and 10-year business failure rates respectively are that 48.0% and 65.3% of businesses fail. So even if you survive the first years and become profitable, it does not get easier. For the continuity of a business after profitability several things should align, a group decision-making process continuing to produce good decisions, owner-managers delegating management functions more and more as the business grows, and the strategy of the owners consistently being expressed in a business plan which is executed and revised on a continuum.

The longer the business operates profitably, the more it increases in value. At the point of consistent profitability the owners’ strategy should focus beyond profitability to deriving the maximum value from the business. The wealth-building event that transfers the maximum value from the business risk of owning a business to the relatively lower risk of having that value in personal investment assets is a sale of the business to a third-party buyer.

The Prior Diligence strategy is the process a business owner utilizes for deriving maximum value from a business sale. It is the seller’s preparation for the buyer’s due diligence, which is the buyer’s investigation of the business as a part of the sale process. Prior Diligence involves planning done through group decision-making by documenting in writing the decisions of a policy-making group. The plans, strategic and operational, include the setting of goals, performance measurement, and incentive systems linked to value creation. The plans are dynamic and subject to constant revision. Prior Diligence installs processes that encourage managers and employees to act to maximize the value of the business with a philosophy of managing the business to sell the business.

There are requisite components which must be in place to derive maximum value from a business interest. The owner of the business interest must perceive and anticipate the inevitable separation of the owner from the business interest. There should be co-owners who each understand the benefits of co-ownership of a business. Majority ownership control can be maintained while obtaining the benefit of group decision-making. The value of each owner’s interest is insured by buy-sell provisions in an owner agreement. The value of a business interest owner to owner (fair value) should be understood to be different from the owner’s share of the market value of the business. To obtain maximum value for a business there must be a sale to an unrelated third-party where no owner’s participation in the business is deemed essential to the success of the business.

Accomplishing the maximum, as in being the best, is not always obtainable, but no one said it would be easy. The maximum is a worthwhile goal. What is obtained by striving for the maximum will bring better results than if the effort to obtain the maximum were not made.

No one said it would be easy. Resolve that no matter how you are separated from your business interest, the maximum possible value of that interest will go to your heirs as your legacy. If you make that resolve in good faith, you have established the first component. Keep going. If you do not have co-owners, contemplate reasonable ways to obtain co-owners without losing legal control. With your co-owners, negotiate and create a contingency succession plan with basic buy-sell provisions. Endeavor to understand and utilize the dimensions of group decision-making and how that planning activity can cause execution of planning to make the business more viable. Start discussing the value of the business and the differences that exist between the amounts owners pay one another for interests in the business and the amount an unrelated third-party might pay for the business interest.

My name is Rick Riebesell and I am principal consultant of Business Transition Consulting (https://btcllc.net) and author of the blog Business Concern (https://businessconcern.net). For a business owner wanting to implement the Prior Diligence strategy, I write a Substack called Owning a Business (https://rickriebesell.substack.com) with an archive of information about the Prior Diligence strategy and through the chat process providing a dialogue with me and other business owners about the business ownership experience. Thanks for your attention.

The idiomatic phrase – shoulda, coulda, woulda – conveys the feeling you as the owner of a business might have in three years. Ok, “Could’ve, Would’ve, Should’ve” is a Taylor Swift (and Aaron Dessner) song. But it derives from the phrase often written as “shoulda, coulda, woulda.” The combination of the meaning of each – should conveying correctness, could conveying possibility, and would conveying a thwarted intention – yields a meaning of the uselessness of looking back or looking for excuses. Pat Riley, President and former coach of the Miami Heat and the Los Angeles Lakers famously said: “There’s no such thing as coulda, shoulda, or woulda. If you shoulda and coulda, you woulda done it.”

In my experience, three years is about the time it takes to prepare a business to be sold for the highest possible price. Most business owners are so concerned with the urgent matters of the business that they fail to pay attention to the important matter of assuring that the termination of their business interest results in a wealth-building event. This important strategy, which I call Prior Diligence, can result in wealth-building results but only if it is learned and utilized. I have outlined the Prior Diligence strategy in a series of posts on Substack called Owning a Business (rickriebesell.substack.com). The sooner it is implemented, the closer the wealth-building event.

If you are the owner of a business interest in a profitable small to medium sized business, your primary concern should be to realize the maximum value from that interest. To be precise, “realize maximum value” means receiving the most net cash for that interest thereby converting the value in the business interest from a high risk business ownership to a personal asset held at a relatively low investment risk. This is when the sale of a business interest is a wealth-building event.

Think down the road three years. What would it mean to be selling your business for the maximum value? For most profitable businesses it would be a wealth-building event. Think about the businesses that you are familiar with who have not been sold for maximum value but have been the subject of disputes among the owners, had an owner essential to the business leave the business, or for one reason or another been liquidated. There is a strategy to follow that in three years will have that wealth-building event more available to you. Or in three years you will be saying: “shoulda, coulda, woulda.”

The quote is from Mordecai Evans who is the Lead Advisor for Business Acquisition Advisors, LLC located in Augusta, Georgia. Mordecai went to work for a pharmaceutical company after graduating from Clemson. His passion for entrepreneurship and sales led him to becoming a broker with a business brokerage firm. Recently, Mordecai formed his own merger and acquisition firm, Business Acquisition Advisors.

Rick asked Mordecai to do a Zoom interview about his experiences with the small to medium size business market. What follows is a summary of that conversation.

Rick began by asking about what the broker’s response should be to a business owner asking about what is necessary to sell a business. Mordecai answered that after looking at the financial statements and the marketplace, he takes the buyer’s perspective and conducts a “pre-due-diligence investigation.” Also, he conducts a conversation with the seller about price expectations. For the highest price possible there may be some things that need to be changed, which might take one to two years. There is always the option to take the business to market without a price to better understand what the market price might be.

Rick observed that the diligence investigation Mordecai conducts is similar to what he recommends for the business owner with the strategy of Prior Diligence explained at his substack (rickriebesell.substack.com). Often, the reason owners fail with the strategy is that they fail to prioritize important tasks of planning and taking action while paying attention only to urgent tasks.

Mordecai mentioned that he had a friend who said: “The only reason to start a business is to sell a business.” The point being that a business owner should run the business like a business not a job. “Nobody wants to buy a job.” Business owners are often well advised to counsel with a business broker, understand the market for their business, and make the changes over time to obtain the highest price for their business.

Rick responded that where the owners of a business have received advice from a broker that to get the highest price there were some things to work on, that work might take as much as three years. The issue arises of an owner who might not make it to the end of three years for health or other reasons. In this case, the owners should have an owner agreement among them to provide a value, among other things, to a withdrawing owner. Mordecai provided some examples of where business sales were adversely affected by the absence of an owner agreement.

Mordecai cited a recent video he had done on identifying a business broker early in the sales process to obtain advice about what buyers are looking for.

Rick asked about the relationships of the professionals, such as lawyers, accountants, and appraisers, with business brokers. Mordecai pointed out that business brokers, like consultants, can talk directly to all the parties unlike the professionals who have client relationships involving advocacy and confidentiality constraints.

Rick and Mordecai discussed the difference between selling to an insider, such as an employee or other owner, and selling to a outside buyer without prior experience in the business. An insider will not pay as high a price as an outside buyer, because the insider already possesses the “good will” knowledge that an outside buyer will pay for. Notwithstanding an appraised value for a minority interest, that type of valuation is not available in the marketplace because there is no market demand for a minority business interest.

For those looking for a business broker relationship, Mordecai’s contact information is as follows:

Mordecai L. Evans, Lead Advisors

Business Acquisition Advisors, LLC

mevans@baallc.biz

Office: 706-828-1483

Mobile: 706-631-2466

If you are thinking about who is going to buy your business, you have already dealt with the significant core perception necessary for business strategic planning: that inevitably, voluntarily or involuntarily, with good results or bad, you will transfer your business interest. The reality check for the owner-manager of a business is the perception of and planning for the inevitable transfer of the business interest. Coming to this realization is the basis for the Prior Diligence strategy.

The owner and the business will separate, the principal unknown factor is when and what happens to business value. If you are the owner of a business interest in a profitable small to medium sized business, your primary concern should be to realize the maximum value from that interest. To be precise, “realize maximum value” means receiving the most net cash for that interest thereby converting the value in the business interest from a high risk business ownership to a personal asset held at a relatively low investment risk. This is when the sale of a business interest is a wealth-building event. The Prior Diligence strategy enables that wealth building event. The Prior Diligence strategy is described in a series of posts on the Substack called Owning a Business (rickriebesell.substack.com).

Business strategy cannot be effective if there is a denial about the inevitability of the transfer of the business. Once the inevitable transfer is acknowledged, even though the time may be impossible to know, the probable buyer and the terms of the transfer, may be envisioned. Business strategy should have a primary goal of formulating the transfer of the business to known and probable buyers for the highest possible price. This is the essence of being able to realize maximum value for the business interest of the owners of the business.

In finding a buyer, it is helpful to ask: “Do I know anyone who will give me cash for my business interest?” For most businesses, the logical purchaser is someone who knows the business and is capable of raising the cash to make the purchase. Very likely, this person is already a part of the business. Moreover, it will be easier to identify a buyer when the buyer is someone you know and someone who is familiar with the business. There is, however, a downside to selling to someone already involved in the business.

Someone in the business knows certain things that persons outside the business will pay to learn. Put another way, there are certain items of know-how or goodwill that an inside buyer will not pay for because the buyer already knows them. A person outside the business, a third-party buyer, will pay for this knowledge. Therefore, to maximize the price (the value received for the business) ideally the sale should be to a third-party buyer.

Do you know third-party buyers? Probably not. If you do not know a third-party buyer, then find one. But this search will take time, and the planning for it should be part of the strategic plan. What do you do in the interim? If you die or become disabled in this interim time what happens to the value in your business? How will it pay out to your family? For the interim, the probable buyers will be the only ones known, the ones already involved in the business and who may already be owners. There should be an owner agreement in place to assure a value for each business interest. For foreseeable trigger events (for example, death, disability, termination of employment, or withdrawal) there should be an enforceable sale at an acceptable price to provide assurance of value to each owner. The owner agreement, in addition to establishing an assured insider sale for interests in the business, also needs to provide for a transfer of a controlling, if not a total interest, to a third-party buyer. Most of the time, for all owners, receiving the maximum value for their business interests will be in the best interest of all.

To find the unknown third-party buyer, you need to role play. There are certain groups that usually contain buyers for a business: competitors, similar businesses in other markets seeking growth, and investors. Place yourself in their position, assume a requirement of rationality, and ask: “Would you buy the business interest?” If not, then ask: “Why not?” If the purchase of the business interest does not make sense, the first task is to meet the rationality test: the purchase of the business interest you have for sale must make sense for a third-party buyer. In making this determination you will be directed toward people who would have an interest. You need to interact with these potential purchasers to see if your role playing was accurate. Again, ask “Why not?” if there is no interest. This feedback is the most reliable feedback you will ever obtain about how well your business is managed.

As the owner of a small to medium sized business, there is no better way to plan and manage your business than with the contemplated buyer looking over your shoulder. Accounting must be current. Human resources records up to date and in compliance. All regulatory requirements must be met. Taxes must be paid up to date. The same diligence checklist a sophisticated buyer would use should be used to check the status of the business. This is an important part of the Prior Diligence strategy.

When you approach planning and management with the perspective of a potential buyer, you will see the things to do that make the sale more attractive. The business will become more valuable and will be sold for a higher price when the inevitable sale must take place. Rather than denying the inevitable separation of the owner from the business will happen, plan for the sale and provide for a transfer for maximum value to a third-party buyer.

Who might this buyer be? Small to medium-sized businesses can be attractive acquisition targets for various types of buyers including individuals, private equity firms, strategic buyers, family offices, holding companies, search funds, and employees.

Individual buyers are often professionals with industry expertise looking to own and operate their own business. They may use personal savings, 401(k) rollovers, or SBA acquisition loans to fund the purchase. Individual buyers typically target businesses with under $2 million in profit. Individual buyers outside the business will likely be involved in the industry of the business and may even be known to owners of the business.

Private equity firms use investor capital to acquire businesses. While they usually focus on larger companies, some private equity firms look for “bolt-on acquisitions” of smaller businesses to add to their existing portfolio companies. They may consider businesses with as little as $5 million in profit. Identifying these firms involves finding recent transactions of small to medium sized businesses and understanding the basis of the transactions.

Strategic buyers are other companies, often in the same or related industries, looking to expand their operations, gain market share, or acquire new technologies or capabilities. Often a competitor is the strategic buyer for a business – to expand a market or consolidate operations.

Family offices manage the wealth of a single wealthy family and may invest in businesses related to the industry that generated the family’s wealth. They tend to have longer investment horizons and take less active roles in management compared to private equity firms. Family offices often are looking for increased returns than could be obtained with traditional investments, but will also want stability and consistent profitability.

Holding companies are companies that exist primarily to own other businesses. They generate revenue from the dividends and earnings of the companies they own. Holding companies often look to synergy opportunities between the companies they own.

Search funds typically consist of an individual (often a sophisticated manager) backed by investors, looking to acquire and operate a business. A search fund is often looking for a project that involves an opportunity that can be pursued with an existing business structure.

Employees can gradually become owners of the business through Employee Stock Ownership Plans (ESOPs). An ESOP can work very well in the right situation, but these situations are not frequent and an ESOP that does not work can be disastrous to the future of the business.

Realize that it is inevitable that you will transfer your business interest. Keep a constant vigilance to recognize who might be a third party buyer of your business who will pay cash for the maximum value of your business interest. Use the perspective of a likely third-party buyer to better understand how to make your business more valuable. Practice Prior Diligence to assure proper financial documentation, accurately valued assets, and a management team in place. These factors can make the business more attractive to potential buyers, help ensure a smoother sale process, and accomplish a wealth-building event.