I’ve had the privilege of working with entrepreneurs to transition their business to others, and I’ve noticed a disturbing trend. Many business owners may be unprepared to transfer their business when the time comes to sell. This not only delays the liquidity event, it can also have a material negative impact on the value of the business.
If you are a business owner over the age of 40, I’d like to give you some key insights to think about now so you can start to prepare for your business transfer. Even if you think this may not happen for another decade, these insights will help you be ready when the time comes.
Not if, but when
If you are a business owner, it is inevitable that your business will one day transfer to someone else. This might be children, a key employee, another business who buys you out or a private owner. But this is not a question of “if” you’ll transfer the business, but “when” you’ll transfer the business. It is unavoidable.
Many business owners wake up one morning in their mid-50s or early 60s and decide that today is the day for them to start the process of selling their business. By then, it may be too late to ensure that their liquidity event is everything they want it to be. It doesn’t have to be this way.
Here’s my key message to you. Most transitions, even for highly profitable businesses, are not voluntary, they’re forced. In these instances, the liquidity event ends up being far less than it could have been if the business owner had started planning years before they decided to sell.
Let me give you some examples:
- A business owner has a health event that forces them to give up, or heavily curtail, working. This negatively impacts the operations of the business and forces the owner into a fire sale.
- A business owner has a partner who suddenly passes away. The remaining business owner cannot run the business by themselves so they face a quick sale, negating business value.
- A business owner encounters a down-turn in their business and they feel it would take too long and too much effort to bring the business back. So they sell it for far less than it could be worth if they had sold it at its peak.
- A business owner plans to transition their business to the children. But soon after college, the children choose not to run the business. The business owner has no alternative succession plan and so sells the business for far less than it is worth.
- A business owner wants to sell their company, but a review of their operating model and financials makes this challenging. The operating model reveals special circumstances that other business owners cannot replicate with ease because the company is too dependent on the current owner for day-to-day success. The financials reveal certain details that the current owner understands and is comfortable with, but other owners do not understand and are not comfortable with (debt, loans, customer concentration, etc.). These details, which could be worked out given time and planning, erode the value of the business.
These are just some examples of the kinds of situations I’ve seen. But the point is that all of them can be addressed if business owners start planning now. Time is on your side now, but it may not be in the near future.
The two key focus areas
When thinking about transitioning your business, there are two key areas around which you need to build your plan: personal readiness and business readiness.
A plan that only addresses business readiness may realize a great financial outcome, but may not include a happy and united family. For nearly every business owner I’ve worked with, the outcome that matters most is how the family is situated after the liquidity event.
Let’s look at some key considerations for personal and business readiness.
I cannot state what it means to you to be personally ready to sell your business. However, I can give you a list of considerations that have helped me guide other entrepreneurs toward a satisfactory family situation after their liquidity event.
Let’s start by focusing on your personal financial needs, for you and your significant other, after the liquidity event.
- How much money do you need every month after you sell your business?
- How much do you want in savings or some other easily accessible accounts?
- How much do you plan to invest?
- How do you think you’ll handle the proceeds from the sale of the business?
- What are your financial goals for children or other dependents? See my article called Transitioning Strategies For Family-Owned Businesses.
- What are your charitable intentions?
Now let’s talk about what you’ll do with your time after you sell your business. This is an area where I believe most business owners do the least amount of planning. You may not realize how ingrained your working life has become, well, in your life.
I’ve written another article on this topic called What To Do After Your Liquidity Event. This contains some ideas to help you think even more about this important area.
To be ready to transition your business, you’ll need to spend some quality time coming to understand the process. This usually requires some education and some investigation on your part. Business owners who just wake up one morning and think they can sell their business will be sorely disappointed.
You are an expert at running your business. But other people are experts at selling businesses like yours. If you are not getting insights about the process from experts, you may have a hard time adjusting down the road. It is advisable to learn right now how businesses like yours are liquidated.
Another important part of personal readiness is having a plan to share with others what you intend to do after the liquidity event and the process you think you’ll go through to achieve your desired outcomes. This may take a lot more time than you realize. Just think about the number of people who you’ll likely want to talk with:
- Your spouse or significant other
- Your children
- Your business partners or trusted employees
Your business is intertwined with your life. It has taken years for your business to become the centerpiece that it is today. It probably occupies a big part of your identity as a person. It is highly unlikely that you will quickly or easily unravel the many strings that tie your business into your life today. So please carefully consider what steps you’ll take to prepare yourself and others for this transition.
Personal considerations will definitely impact your transition plans. But so will business considerations. In my experience, these are the core areas where an entrepreneur needs to focus their efforts:
- Defining and building a formal transition plan.
- Assessing readiness to transfer.
- Getting a professional valuation.
- Demonstrating solid financials.
- Identifying the key drivers that impact value.
Let’s look at each of these points in greater detail.
Defining and building a formal transition plan
A formal transition plan is one of the most important parts of ensuring a successful business sale that maximizes proceeds. This is an area where most entrepreneurs struggle. This is often because they see the transfer of their business as something they don’t want to think about, for a variety of reasons. The sale of a business often represents the end of something near and dear to business owners.
My counsel to you is that you need a team to help you build your transition plan and then execute the actual transition. I’ve written an article about having formal transition plans that documents further reasons about why this is important. It’s called Five Reasons Business Partners Need Formal Contingency Plans and the counsel is applicable even if you don’t have partners.
Assessing readiness to transfer
The old saying in business is that timing is everything. Most companies go through upswings and down turns in growth. Sometimes you are whipping up on competitors and sometimes you are struggling to keep up.
This is why I recommend that you have a professional evaluate with you the trends you foresee for the future. It might make sense to transition now, or it might make sense to wait five years or so. The timing of your business transfer could have a huge bearing on the proceeds that pass on to you.
Getting a professional valuation
This is an area where you should not cut corners. Professional business valuators are an invaluable part of establishing the actual market-value of your company. In my experience, most business owners tend to over-value their business and end up with unrealistic expectations about how much wealth they’ll realize from the liquidity event.
You want to base your after-sale plans around realistic, not aspirational, numbers. A professional valuation will help you not only see your business worth but also help you understand what you need to do to improve proceeds and make your business more attractive.
Demonstrating solid financials
Financial statements are a critical part of the business valuation and transfer process. Too often I have discovered that business owners have special knowledge about certain aspects of their financials that other people would find unacceptable. This might include how debt is structured, how loans are structured, or even how deals are structured today (handshakes versus formal written contracts with key clients).
So I’d like to ask you some questions:
- Are your company’s financials in good order?
- Does your company have audited financial statements and internal controls in place?
- Do you have a qualified financial professional in a senior role in your organization?
- Are the company’s financial statements reliable and consistent so that a potential buyer will feel comfortable with the numbers?
These details can make or break the business transfer.
Identifying the key drivers that impact value
I noted above how timing can impact the proceeds of a business transfer. But there are steps you can take to improve the attractiveness of your business no matter what market conditions exist. Here are some key questions to ask yourself about strategies to improve business value:
- Have you identified the key drivers that maximize your business as well as the key risks that could devalue your organization?
- Have you bolstered the core strengths that make your business more transferrable?
- Have you addressed the key risks that can detract value from your business?
- Do you need new people to fill key roles in the organization to make it more attractive to buyers?
- Do you need to step away from day-to-day operations to empower key employees to run the business? This may give assurances to potential buyers or next generation owners that the company can thrive, even after you depart the business.
How will you prepare?
In this article I’ve given you some key considerations to assess both your personal and business readiness to sell. But I now want to leave you with this one parting thought.
This is not a solo flight and you are better off doing this planning and thinking with a team. But the question becomes, who is on your team? Who is helping you think through and document your plans for all of these key areas?
There is a lot to think about here and you shouldn’t have to go it alone. If I can help you down this path, I’d appreciate the opportunity to have a conversation. You can also check out the webinar I’ve developed on this topic called How To Transfer A Successful Family Business To The Next Generation.
If I can be of assistance, please reach out to me for a conversation.
The information contained in this article is provided for informational purposes only. No illustration or content in it should be construed as a substitute for informed professional tax, legal, and/or financial advice.