Dear BTF Community,
For many owners, selling the business is tomorrow’s problem.
The trouble is that leadership, financial discipline, customer relationships and owner independence can’t be built overnight.
Mike McIsaac, Partner at Baker Tilly, has seen what happens when owners wait too long to prepare. Building value starts much earlier, with decisions made years before a transaction is on the horizon.
Key Takeaways for Business Owners:
- Many of the best exit preparations are simply good business practices.
- Leadership, systems and financial discipline become much harder to fix at the point of sale.
- Owners can erode value when they stop investing as an exit approaches.
Enjoy,
Mark
Selling Is Tomorrow’s Problem
Mike sees a straightforward reason owners postpone transition planning.
“Most business owners are builders. All they know about is building business, doing business, and they’re not sellers of businesses.”
Their attention stays on customers, employees, growth and the problems directly in front of them. Selling can remain abstract until retirement feels closer or priorities begin to change.
Mike doesn’t believe every entrepreneur needs to start a company with an exit plan. He does believe owners should start strengthening transferability well before a sale becomes urgent.
“Those same improvements that make a business attractive to be bought make the business better to be an owner.”
Better cash flow, lower employee turnover and stronger operations pay off today while preparing the company for whatever comes later.
Buyers Can See When Preparation Started Late
Mike compares an unprepared business entering the market to a house given a fresh coat of paint when what it really needed was years of maintenance.
“You can tell a business that is not ready to be sold. It’s not much different than a home that has Band-Aids on it or a fresh set of paint versus full renovations.”
Financial reporting is one place where that becomes obvious. Mike has seen businesses reconstruct years of monthly financial information because accounts weren’t consistently reconciled or reviewed.
Poor receivables discipline; excess inventory and inconsistent work-in-progress reporting can eventually surface in working capital negotiations.
These aren’t issues created by the transaction. They’re habits that have accumulated over years, which is exactly why they’re difficult to repair when a buyer is already looking.
Build Value Beyond The Founder
Leadership is one of the biggest opportunities Mike sees for owners preparing ahead.
“You need to start building the leadership team underneath you, and they need to participate in making decisions that are critical to the business.”
That means giving the next level of management experience in the decisions that shape the company rather than waiting until the founder is preparing to leave.
Systems matter for the same reason. Processes need to be documented, understood and followed so critical knowledge doesn’t leave with the owner.
Customer concentration can also affect transferability. Where concentration can’t be reduced, owners can strengthen relationships beyond the founder, review change-of-control provisions and look for ways to make revenue more predictable.
The question underneath all of this is simple: how much of the company’s value stays behind when the owner leaves?
Don’t Stop Investing Before You Sell
Some owners begin protecting cash as an exit approaches. Equipment replacements are postponed, technology investments are delayed and spending on people becomes harder to justify.
Mike has seen that decision backfire.
“If you stop replacing equipment or investing in upgrades, that can come back as a purchase price adjustment almost dollar for dollar.”
There can be another cost. Underinvestment may reduce efficiency, which can put pressure on EBITDA and valuation at the same time.
For an owner five years from a potential sale, Mike’s advice is to keep investing in technology, leadership and people.
“Keep investing in technology, leadership and people. Buyers want to see it, but so do your employees and customers.”
A company still needs to be moving forward when its owner begins thinking about stepping away.
Could You Leave For A Month?
Mike offers a practical test for how transferable a business has become.
“Can the founder go away for a month without things falling apart? That’s a practical test of whether the business is truly ready to operate without them.”
The answer reveals whether the management team can respond when circumstances change, whether reporting is reliable and whether decisions can happen without waiting for the founder.
Financial performance matters, but readiness also shows up in how the organization functions when the owner isn’t there.
Building that independence takes time. Five years out, Mike would focus on stronger management, better reporting and, crucially, transferring both responsibility and accountability for decisions throughout the organization.
Final Reflection
The “Maui Effect” describes the point when an owner starts mentally moving on from the business. By then, much of the groundwork for a successful transition should already be in place.
Mike’s advice comes back to one principle:
“Value creation begins years and years earlier by building a business that doesn’t depend on the owner in the first place.”
Leadership, reporting, systems and continued investment shape the value of a business long before anyone starts negotiating a deal.
For owners, working on those areas now creates a stronger company to run today and more options when tomorrow eventually arrives.