Aspen current thinking column


Spring 2013

May 2018 Current Thinking Column

Wednesday, May 02, 2018

Timing and Transitions: Current Issues and Approaches

Editor’s Note: There are several dynamics impacting the marketplace that are effecting today’s closely held business owners as they think about their own transitions and that of the future of the business:

  • The new tax act
  • The large number of baby-boomers who are reaching “retirement age”
  • The availability of capital looking for good businesses to buy
  • The speed of change in the way we are doing business due to rapid changes in technology

Bill Roberts, describes what he is seeing and hearing as he travels the country doing private briefings of business owners in transition.

Bill Roberts
Aspen Family Business Group

There are interesting dynamics occurring in the Business Succession space. The new tax act has business owners questioning its effect on their income tax planning, the value of their business in a transition, and their estate planning documents. Unfortunately, many of the questions are still not answerable as congressional conference committees are still working out the provisions. In addition there are many questions as the current generation of owners age that arise about decisions regarding the future of their transition plans depending upon the availability of qualified successors, the future of consolidation and the expectation of another downturn in the economy.

We are involved in giving Private Briefings to owners of both family and non-family businesses. They are bright, aware and thoughtful owners all in some phase of their succession planning. The questions they are asking might very well be concerns or issues you are facing in your transition planning. Therefore, I thought I would share the questions and some of our thinking regarding the current landscape of transition planning.

From the 3,000 foot level, this is a time of enormous turnover in America’s small business. A 2015 study estimated that 75% of private businesses will change ownership by 2025. Our experience reflects activity in that space commensurate with that study. Our merger and acquisition acquaintances tell us they have never seen the buy-side activity as high as it is presently. Multiples of earnings (measured by “earnings before interest, taxes, depreciation and amortization” commonly referred to as EBITDA) being paid for operating businesses range for good businesses from 6-8x EBITDA. Some select businesses who are approached by strategic buyers pay even higher multiples. One of our clients commanded 12x EBITDA in a sale to a company in their space who wanted to fill a gap in their offerings.

One of the questions from our Private Briefings is “will this level of activity and multiples of EBITDA remain?” The answer of course is “not likely.” One very good reason is that there is a tremendous amount of cash in private equity funds and on corporate balance sheets now. As more and more businesses come to the market, the “dry powder” will eventually dry up, multiples will drop and likely only the best prepared businesses will be purchased. Even those will likely not command the level of multiples we see today. It is the law of supply and demand, as more business come to market, and the supply of buyer’s capital diminishes, fewer sales will result.

Which brings me to the question of “timing.” We field many questions such as “when is the best time to transition my business?” Or “I intend to transition my business when I retire, is that a good time?” The answers to those questions are as varied as are the situations surrounding the business. Is the business a family business? What are the family’s values around the question of keeping the business in the family? Is there a leader stepping up who could grow and run the business? If there are multiple owners, are their visions for the transition of the business in sync? There is no end to the different situations which demand much thought and thoughtful discussion to arrive at an answer. Creating a “container” for dialogue about these important issues and coming to consensus on a shared vision for the future of the business is a critical strategy for successful transitions.

However there are two considerations that exist today that make the timing an even more important question to address. One we have discussed, how long is the treasure chest of “dry powder” going to last? Do we have 5 years left in this run, do we want to be on the front end of the time frame or can we increase earnings and therefore the transition value commensurate with the risk entailed in waiting? Many economists and business leaders have varying assumptions about this question.

The second risk is unique to the world in which we now live. Is some 17-year old sitting in his or her basement creating an app or a new way of thinking or operating that will essentially obliterate the value of our businesses? We have seen multiple examples of this risk in our recent lifetime. Take the newspaper business which is struggling to remain relevant. Values have plummeted. We recently heard of a publishing company that was offered over 200m for the company and its news operation in a large city. The decision was made to pass and keep the company. Today the company is worth a fraction of that value because we do not get our news from on paper any longer and advertisers are moving away from newspaper publishers. Other more accessible and less expensive methods are available to everyone.

We think the lesson learned from both of these examples is that businesses must be more nimble than ever. Change is inevitable and the quicker we are to react and get in front of the change the more likely we are to maintain enterprise value. The second lesson is the better prepared the businesses are the more likely they are to be attractive to a next generation or to an outside buyer. The thought that we can wait to “retirement or burn out” is fraught with the danger that the business may have lost its attractiveness and consequently its value.

Which leads to the question: “What do I need to address to maximize the value of the business to my family or to a third party?” One answer is a well-run company that has the infrastructure in place to support growth. One place to begin is to have someone you know and trust perform a “due diligence” study of your business. One such study revealed that there were over 100 pirated software programs on the company hard drive. Any buyer would likely have discovered this issue and have demanded a reduction in price for the business. Another company’s revenues were dominated by one customer to the tune of over 50%. The estimate is that this one fact would cost 3 to 3.5 times the multiple of EBITDA in a sale. Generating solutions to the issues will make your company a better place to work and ready you for an unexpected offer to purchase your company.

The axiom that seems to apply to many situations but particularly in readying a business for transition is the 5 P’s of planning: Prior Preparation Prevents Poor Performance! Take the time to evaluate your business and your transition plan. If you were a third party independent appraiser, how would you grade your transition plan on a scale of 1-10. Be frank and honest, and if your grade is a failing one, take action, seek advice from your advisors. Talk to a family business consultant. If your goal is to sell, visit with a knowledgeable mergers and acquisition investment banker. Listen to their analysis of your business and then form an action plan to address the issues presented. You will be happy you did.

Bill Roberts, CLU. ChFC

Bill has recently moved from the firm he helped to found, Auctoris to Erben Associates to work with his son Korbett. This move allows Bill to continue to develop his transition plan for my clients. “Korbett, my son, is a talented advisor who, like me, specializes in working with family businesses. Together we make a unique team in working with families in transition. I am pleased and excited about the opportunities ahead of us as we expand the capabilities of our new firm to address our client’s needs.”

You can learn about my new business home at

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