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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.

It is human nature to seek comfort and complacency, we tend to do that which makes us feel good. As most understand, this is not a recipe for success. In the arena of small to medium sized businesses, the owners of these businesses are often the founders of the businesses and the most productive elements of the businesses. Where the business has succeeded and consistently earned a profit, for the owner performing the role of producer and manager can be an ego boosting experience. Continuing to do this feel-good activity, however, assures that the owner will not realize the maximum value from the business when there is the inevitable separation of the owner from the business.

Chances are if you founded the business, you are the best producer for the business. In fact, it is also likely that you enjoy exercising your skill and ability. Those talents are a part of your self esteem and provide satisfaction to you.

As a business owner, the success of the business is likely attributable to your ability as a manager. You have built a team and established a successful business system with your management skills. This also is a part of your self esteem and provides satisfaction to you.

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. If your concern is to receive maximum value from your business, you must forgo these feelings of self esteem and satisfaction. Much as your role as a skilled producer or a brilliant owner-manager means to you, it will cost you money. The less you stroke your ego, the more money you will receive from the sale of your business.

Put yourself in the role of a sophisticated buyer of a business. What is it you want from a business? Fundamentally you want an established system of profitable operation. If the most important part of that business, be it a producer, a manager, or both, is the selling owner who is going away right after you buy the business, that is a negative factor causing you to devalue the business or not purchase it at all.

When an owner who is an integral part of the business is selling the business, the critical question is what does that owner want to do after the sale? Will that owner continue to be an integral part of the business? Will the motivation of the owner remain the same? Does some part of the payment have to be withheld to insure the selling owner’s cooperation with the buyer? Will the owner who is an integral part of the business continue as an employee? A consultant? The more the selling owner is paid of the purchase price, the less motivated the selling owner is and the less leverage the buyer will have to compel cooperation. An owner seeks to sell a business to be less involved with the business or not be involved at all. Where the business forecast depends on the selling owner’s efforts, this is an item of tension for both seller and buyer.

Compare this to a business where the owner is not an integral part of the business, and the business structure will not change after the purchase. Which business would you want to purchase? For which business would you pay a higher amount?

Most owners do not withdraw from production and management roles because they enjoy the ego boost of doing that at which they excel. Many owners, even though they know they could fail to realize maximum value from their business interest, continue to be producers and owner-managers instead of owners.

If you want increased value and wealth for you and your family, adopt a strategy that will stop your productivity and management activity. That strategy should be the basis of a business plan that will cause that change to be made. That strategy is called Prior Diligence. I have outlined the prior diligence strategy in a series of posts on my Substack called Owning a Business (rickriebesell.substack.com).

Here is the way to begin:

First, gather the resources and information you need. Read about and understand Prior Diligence. Assemble information by listening to business stakeholders and those operating the business. Seek out those who have succeeded in leaving the production and management roles of businesses they own. Determine how the change was accomplished. Do not be reluctant to ask for help and advice.

Second, write out your Prior Diligence strategy and create a written plan with the other owners and the stakeholders of the business. State the goals clearly and establish mileposts for performance.

Third, understand that change cannot occur where discipline and focus are weak. If you are not disciplined against the seduction of the irrational notion that you are the only one who can do the production or management work in the business and if you do not continually focus on finding and training one or more people to do the tasks you are now doing in the business, the change will not occur.

Fourth, Take the change in steps over a time period that allows for the complete process to come into place and be effective. The right person with the right set of skills may be hard to find, or it may be necessary to refine job descriptions so that more than one person does those duties. Do not think that you can do it all at once, that it will be easy, or that it will be immediately successful. Citing early difficulties as failures to stop the change process is a failure of discipline – a way to go back to the fallacy that you are indispensable to the business success.

Fifth, be accountable. Make a written plan with the other owners. Let the other stakeholders in the business know what are the goals and how they are to be accomplished. Allow the other stakeholders in the business to help, but understand that if the process fails, it is you who are accountable for the failure. Owners often procrastinate or derail management change based on fear that they will no longer be able to control the business. This is less likely to happen where stakeholders are aware of the process.

The change from producer and owner-manager to owner creates wealth for the owner and the owner’s family. It is not easy, but neither is founding and maintaining a successful business. Generally, owners who have created a successful business are quite capable of following Prior Diligence and executing a plan to create increased value for the business interest.

How do you accomplish what is important? It takes discipline and scheduling to accomplish tasks that are important but not urgent. These tasks are recognized as important, yet many people cannot accomplish important tasks such as becoming fluent in a language, learning to play a musical instrument, or writing a personal or business plan because they choose urgent tasks instead.

Here is an example. It may be important to you to stay physically fit. If you are fit now, it is because you have maintained an exercise program over time. Each exercise time was not urgent, but completing each exercise period over time was important. That meant you scheduled each exercise time and did the exercising at the appointed time. You also recognize that if you do not continue exercising, you will not continue to be physically fit. If you allow the “something that came up” to keep you from the scheduled exercise period, you will lose your physical fitness.

The steps: (1) identify what is important, (2) determine what actions are necessary to accomplish the important task, (3) schedule the time for the steps to accomplish the task, and (4) practice discipline to maintain the schedule.

First, what is important? Can you put it in writing? If you can, you have a strategy. A strategy is a narrative of what is important to you. If you do not have a strategy, then create one. But since we have only thirty minutes, let’s not overthink it.

Take no more than five minutes and a blank sheet of paper and list what is important to you. After five minutes, categorize what you have written. For example, you may have written the following list of what is important: “supporting my family, maintaining my health, contributing to the community, and leaving something behind for those who follow me.” These can be categorized into: “family, health, community, and legacy.”

Now take five minutes, look at your calendar, and review the last four weeks. On a separate sheet of paper, categorize the activities and list the average hours per week you engage in the activities. For example, in an average week of 168 hours, you might spend 49 hours sleeping. You might spend 21 hours eating. You might spend 14 hours on personal hygiene and care. You might spend 40 hours working. You might spend 4 hours exercising. You might spend 4 hours running errands. This leaves 36 hours. For most of us what we do with those 36 hours is based on a sense of urgency rather than a decision about what was important. Nonetheless, categorize the activities you did for that time. Notice if any of these categories match the important categories you listed before.

Start with a clean sheet and in five minutes answer the question: “What do I desire?” You should be selfish – list what you want most out of life in terms of what makes you happy or satisfied.

You now have three sheets of paper and we are fifteen minutes in. One sheet lists the first important items that came to mind, one lists what you have chosen to do with your time, and one lists your desires. Is there a coherence? Do the personal values you have as to what is important match how you spend your time? Is that really what you want? A strategy helps us put these things together by documenting your careful consideration of what is important and desired to enable better day-to-day decisions about how to spend your time. In the next five minutes again write down what you think is important but also list the tasks that are required to accomplish what is important. This is a way of articulating your values and is a written strategy.

During the ten minutes you have left, compute the time you have available in the average week and schedule the times you will devote to tasks that are important. The tasks should have reasonable milestones and timelines. The scheduled times should be times you can be focused and productive. You will probably not have enough time for all the things you listed as important. You must prioritize your important tasks (thus amending your strategy). Even if you only have time to complete the tasks for one important project, that is much better than not planning, responding only to urgent items, and failing to accomplish anything important.

In a half an hour you have now accomplished something most people never do. You have a strategy and a plan. Now you have the perspective and a reasonable method to accomplish the scheduled important tasks. The discipline of execution – actually maintaining the schedule and completing the tasks is not easy, but it is impossible without the strategy and the plan.

Keep repeating this exercise and revise your strategy and plan as needed. Hey, it only takes half an hour!

Celebrate reaching your milestones and goals. Enjoy the success and satisfaction that comes from accomplishing important tasks and projects.

Business risk is the risk that the business will falter and the entire investment of time and money the owner placed in the business will be lost. For most business owners the motivation for starting a business is that at some point there will be a wealth building event from business ownership. But it is a flip of the coin – half of businesses started will fail. If you own an interest in the typical small to medium sized business, there is a greater than fifty percent chance the business will fail in the first five years.¹ The four most common reasons for failure: (1) poor marketing (forecasting and adequate budget), (2) inadequate management (founders understand production or services but fail to appropriately oversee employees), (3) financing (lack of working capital), and (4) lack of effective business planning.² From my years of experience as a business consultant, I can tell you that if you engage in effective business planning, your business will not fail. If you are effectively planning, you will not make the mistakes involved in the first three reasons for business failure. Effective business planning, like most worthwhile endeavors, is not easy but for those who learn how it can be what makes wealth building possible.

The wealth building event occurs where the investment of time and money in the business is converted into cash in the owner’s personal account subject to investment risk not business risk. Compare business risk to personal investment risk. Business risk is inherent to the operation of a business – it is the uncertainty about whether a company will be successful and generate a profit. Where the business does not perform well, money and time spent on the business will be lost. For most small to medium sized businesses, the risk cannot be diversified over different markets and products. Investment risk is the risk that an investment will lose value. This can happen for a number of reasons, including factors like overall market fluctuations or inflation. However, a investment portfolio can be diversified and be managed to avoid loss of capital. While there is still a risk of loss with investment risk, as compared to business risk, the risk is greatly reduced. If money derived from the business is converted from business risk to personal investment risk, the possibility of financial independence over time becomes more likely.

The secret of planning is that you have to start at the end and work to the beginning. If you want a wealth building event in five years, envision what that looks like. For a business owner, it will most likely be a sale of the business interest for maximum value, removing the value built up in the business at business risk to cash in your personal account at investment risk. That basic strategy can be the beginning of the effective business planning that will make such a wealth building event possible. I call that strategy Prior Diligence, and I describe how to create and execute that strategy and business plan in detail at my Substack site Owning a Business (https://rickriebesell.substack.com/).

Prior Diligence is a strategy that is the basis for planning to accomplish the result of realizing the highest possible value from ownership of a business interest. The components of Prior Diligence are: separation of the owner from management, the presence of co-owners, the implementation of a buy-sell agreement among the owners, a sale to an unrelated outside buyer, and management of the business with dynamic planning. All of these components are described with more detail in the archives of Owning a Business.

You can begin the planning process at any time, no matter where you are with your business. The important thing is that if you are not planning now, you need to start. The sooner you start, the sooner you will experience the wealth building event.

1 https://www.jpmorganchase.com/institute/research/small-business/small-business-dashboard/longevity

2 https://www.chamberofcommerce.org/small-business-statistics/#:~:text=Many%20people%20think%20that%20small,their%20tenth%20year%20in%20business