At some stage every business owner must sell or pass on - transition from - their business. Many ‘transitioners’ have predicated their post exit plans on having a nice nest egg from the sale of their business. But here’s the hurt – it is estimated that as many as 40 per cent of baby boomer owners plan to leave within the next five years. That means we may see a glut of small businesses for sale making it increasingly difficult for lower middle market owners to sell their business at the price they had been counting on.
The fact is, ‘hoping’ is not a strategy. Hoping won’t create value in the business. A strategy involves actually being in control of your business, being aware and goal focused, and having a plan for an organized and profitable ending.
So what will it really take for a business owner to successfully extract themselves from their business? To leave under their own terms; when they want to; and get the price they need?
Strategically decide WHAT you want to have happen
You can’t develop a transition plan without having your end objectives in mind. You need to start by considering your endgame and making some specific decisions:
- How you would prefer to transition - sell, pass on to family, etc
- What you want to do after transition – specifically, so you can set a budget for it
- Just how much money you will need to leave with to make your post transition plans a reality – not just ‘as much as I can get’
- When you want to go – this determines how much time you have left to make things happen in the business.
Plan HOW you are going to make it happen
Strategies need to be assessed and specific plans developed for how they will happen. For instance, precisely how to structure the sale to a third party for top dollar after taxes; or just how you will transfer your business to family members, co-owners, or employees while paying the least possible taxes and receiving the greatest financial security.
The obvious option may not necessarily be the best. Structured withdrawals staggered over a number of years where the owner takes less than market price up front but remains under contract for some time to help out during changeover, maybe in a part time capacity, can add up to a bigger sum than simply taking the first check offered. That’s the value of planning things out.
Actually GET ON with making it happen
Making it happen means taking each of the strategies in the plan and implementing what needs to be done to achieve it. Typically the major one will be to increase the value of the business. Can you imagine putting your home on the market without getting it ready? Not likely – you know it needs to look good and be in good repair to bring the best price. The equivalent with businesses is called grooming for sale. Grooming means looking at ways to improve the value of the business – developing a bigger market share for instance and improving productivity.
Secondly, the business needs to be in sale ready condition. At the time of sale the buyer will run a thorough due diligence check of your business records to satisfy themselves of the viability of the business and the validity of the claims you have made about it. You need up to date financial records and several years’ backup records that all make the business look good.
The third key factor is taking YOU out of the business. If most of the value of the business is predicated on your involvement – your own knowledge of processes, your own ways of doing things and so on - then it isn’t worth much without you. Instead, you have to be able to demonstrate that yours is a turnkey operation that the buyer can run as effectively as you. One way to do this is to have trained employees and systemized processes in place that allow the business to run without your constant oversight.
Transition planning can bring immediate benefits too
Even if retirement seems a long way off and even though some things are going to change your ultimate goals as time goes by, the fact is that because transition planning revolves around taking steps to improve the value of your business there will usually be some immediate benefits from starting the process.
- More profit
- Higher efficiency
- Greater peace of mind
- Clearer focus
To develop a viable transition plan professional guidance is essential. The source of that support may be your accountant, lawyer or M&A advisor. For more information please contact us.
Published with permission from Ran One
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