The topic of “How to gracefully exit a lifelong business” was presented by consultant Hu Zaihua at a financial lecture held at the Chinese American Association in the West of America on Sunday, September 20th. Hu shared insights on enterprise valuation, buyer psychology, and preparation for selling, assisting business owners in early consideration of business succession, sale, and retirement planning to ensure the smooth continuation of accumulated business value.
Having lived in the United States for over twenty years, Hu Zaihua previously worked in a publicly traded company, handling around $300 million in business. Afterwards, he ventured into entrepreneurship and successfully sold his own company for profit. Subsequently, he was approached to assist in selling other businesses, leading him to further research related industries and obtain professional qualifications to engage in consulting work for business acquisitions and sales, now working in this field for about five years.
Hu Zaihua mentioned that many first-generation business owners, when preparing for retirement, may find that their children are not willing to take over the business. These owners often lack knowledge about the true value of their company and are unsure of how to find potential buyers. His role is to assist business owners in reorganizing and packaging their businesses, improving financial, operational, and management structures, and finding suitable buyers to enhance the chances and value of a successful sale.
According to Hu, business owners often hold sentimental attachments to their enterprises, believing that years of investment in advertising, branding, experience, and networks hold significant value. However, when buyers evaluate a company, they focus on profitability, risks, and the potential for sustained future operations.
One common issue during business sales is overreliance on the owner, which can lead to customer loss once the owner retires or the business changes hands, resulting in perceived high risks by potential buyers. Another frequent problem is heavy dependence on the owner himself. If all critical operations, customer relationships, and decision-making are controlled by the owner, the transition to a new owner may face obstacles, affecting the company’s valuation.
Hu emphasized the importance of financial transparency for businesses. Some owners may underreport actual profits to reduce tax burdens or categorize personal expenses as business expenditures during tax filings, resulting in reported profits significantly lower than actual operational performance. This not only impacts buyer evaluations but may also affect whether banks are willing to provide loans to the buyer, thereby narrowing the pool of potential buyers.
Therefore, Hu recommended that business owners planning to retire in 5 to 10 years should start preparing early by reducing personal dependencies within the company, establishing a management team and standardized processes, organizing financial and tax records, and diversifying client sources. It is advisable for businesses not to overly rely on a single customer and maintain a low proportion of total revenue from a single client to mitigate operational risks post-sale.
Hu Zaihua noted that the market for buying and selling businesses covers a wide range of industries as long as the business operates legally, including sectors such as catering, hospitality, e-commerce, manufacturing, and technology. However, he conducts screening based on the company’s size, financial condition, and market conditions.
Regarding the “packaging” before selling a business, Hu Zaihua first works on organizing the company’s finances, clarifying the true operational profit, and evaluating it based on the commonly used SDE (Seller’s Discretionary Earnings). Adjustments are made to some salary, interest, depreciation, and other items related to the owner, meeting evaluation criteria before estimating the company’s value based on industry multiples and market conditions.
For instance, if a company’s annual SDE is around $1 million, applying a market multiple of approximately 3 times may lead to an estimated value of $3 million. Actual multiples, however, depend on factors such as industry, growth potential, client structure, and risks.
Regarding how to prevent current employees and clients from being affected during the sale process, Hu mentioned that confidentiality measures such as initially anonymizing the company name and related information are undertaken in the early stages of a sale. Potential buyers need to sign a Non-Disclosure Agreement (NDA), provide proof of financial capability, and only after qualifying, they gain access to further financial information. Buyer interest leads to arranging meetings, site visits, and further negotiations with the seller.
In conclusion, Hu Zaihua stressed that the process of selling a business should not be left until retirement is imminent but should be planned several years in advance. The earlier a business reduces reliance on the owner, single clients, and opaque finances, the more advantageous it is for future buyer searches, offering business owners more choices upon retirement. ◇