This is not an unusual story.
In fact a liquidator friend of mine in Sydney tells me this story is not uncommon.
Many owners get to retirement age or run out of steam and simply wind things down. Then they call my friend in his capacity as a registered liquidator to complete the liquidation.
Where there was clear saleable value before, ends up as only fire-sale value.
Here is an extract from an excellent book by John H. Brown, “How to run your business so you can leave it in style”that drives home the point of this blog.
I met with the two major owners of a thriving construction company in Denver. Despite the downturn in the local economy, this firm had been able to maintain profits and income because of the wide experience and extraordinary personal efforts of the owners.
When we set up our meeting, I assumed we would be discussing typical year-end matters; income taxes, business continuity, and estate planning. When we met, however, the owners’ first words were, “Can you review this auction agreement? We’re going to sell all our equipment and get out of the business.”
I was shocked.
The owners, both in their early forties, explained that their efforts to maintain the business had drained them. For years they had complied with government regulations and braced for and adjusted to the changing tax code that dramatically affected the tax benefits of their multi-million dollar investment in construction equipment. Now they no longer had the patience, desire, or stamina to continue; they convinced me they were serious about giving up their business. So we began to explore alternative ways of getting money for the company, other than through an auction of the equipment.
First, we considered a sale to a third party, but the business was too large to be bought by any company other than the larger national construction firms. Feelers to those companies revealed little desire to acquire a construction company in the then depressed Rocky Mountains region.
We discussed the possibility of transferring ownership by selling the firm to the employees or offering a buy out to key managers. Both ideas were rejected because, although there were important employees, none had ever been groomed to accept greater responsibilities in the organization. There was simply no one ready to take over and run the business, nor had anything been done to create funding for the owner’s buy out.
The two owners had retained control of all the key functions. Unless they continued in those roles, the business was unlikely to remain successful. Since the owners were unwilling to keep fighting the battle that had worn them down, they sadly decided to liquidate at auction prices, despite years of profitability.
This story illustrates an important point: A business can be both growing and profitable, even highly profitable for a long period of time and yet have little worth beyond the “fire sale” value of its tangible assets: machinery, vehicles, office equipment, furniture, buildings, and inventory.
The Denver construction company was both profitable and growing, yet little value had been created or preserved. And this was a $30 million in annual sales company, not a mom-and-pop store.
How did these hardworking, experience, knowledgeable, and successful partners find themselves in this predicament after years of dedicated involvement in building their company? They never took the time to plan for and create a market for their stock.
A case of business owners not thinking ahead of their business exit. Leaving nothing for the grand-kids nor meeting the costs of their own retirement.
Bottom line they had no Exit Plan!
About the author: I am not necessarily an expert in any one particular subject matter, but what I am particularly good at is helping business owners and teams work through complex challenges & deals and arriving at the best solutions. I have developed a process that gets great solutions & importantly brings all relevant others along for the ride.
If you would like some help: Call Jeremy de Constantin for a pre-consult workshop (2 hours) with me on or off-site on +61 402 242 670 or jdc – at – deconstantin.com.au.