Preparing to transition a business to a family member, partner, or to sell a business is a complicated process that requires long-term strategizing.
Whatever the reason for exiting—whether it be retirement or lack of continuing commitment to the company’s growth—business owners need to ask themselves whether they want to sell or transition. The path for each of these is potentially quite different.
Begin with the end in mind
The key with any business is to start thinking about selling or transitioning sooner than later.
“Even when you’re just starting a business, think about where you see it ending up,” said Manning Elliott CPA and partner Rick Gendemann. “That will set the roadmap for you to work with.”
The more time that is allowed to maximize a company’s value and strengthen its inner management operations, the better financial result for the owner.
Identify the potential buyer
If a business owner decides to entertain selling, the next phase is to figure out who that potential buyer would be, whether it be selling to a partner or management within the business, selling to an outside party or selling to a private equity group.
Owners can then start to determine how they are going to position their business and make it the most attractive to the buyer, maximizing its value. They should start with a review and determination of the current value of the business and what someone would likely pay for it.
“That can set the framework for whether they would like to sell or transition,” said Gendemann. “When you go through the valuation process it brings to light what it is you have to sell.”
The valuation process will help determine whether a buyer would want to purchase the whole business or just certain assets of the business such as; equipment, distribution channels, a customer base or certain intellectual property.
Improve the business’s performance and strategize management
Business owners need to enhance key performance metrics that drive the value of the business. This means identifying exactly what they do in the business and beginning to leverage those responsibilities to other individuals inside the business.
“Often with a private company the owner is intricately involved with the business,” said Gendemann. “What would that business look like if the owner was not there? If they are too intricately involved, then that buyer would be less inclined to buy that business because it’s so dependent on the owner.”
If there are no options for the redistribution of the leadership role within the business, owners need to consider bringing in outside management.
“Systems [need to be] less reliant on individuals, but rather more reliant on a group of individuals within the business, creating the business’s goodwill, as opposed to the personal goodwill of the owner,” said Gendemann.
Choosing to transition
If choosing to transition the business, owners need to identify the individual who has a desire and passion to carry on the business. The owner needs to determine how committed they are to taking on that role and if they have the needed skills and qualifications.
“Oftentimes, the current owner has learned by the ropes for many, many years, and developed a lot of knowledge and understanding of the business that hasn’t necessarily been documented anywhere,” said Gendemann.
Owners need to be positive mentors for potential new owners, or be mindful that even if they want to transition the business to someone in the family, that person may not be the right leader. An outside manager may need to be brought in to run operations.
Businesses will need to identify how the owner will get paid in event of a transition. In the end, the solid inner workings of a business will produce a solid sale or transition and a lucrative exit.
If you are thinking about or currently working on your business succession plan and are in need of assistance, please contact Rick Gendemann.