Most business owners fail to realize they must plan for the sale of their business. According to recent statistics, only 20-33% of business complete the sales process. A study conducted by ROCG, a company that specializes in business transitions showed 84% of the respondents to their survey indicated that the proceeds from their transactions were essential to their future.
According to the same study, 58% of all business owners have no formal plan. Among the reasons given for this lack of planning were:
- Too early to plan
- Too time-consuming
- Too complex
- No adequate advice
- Don’t want to deal with family/employee issues
- Too intimidating
While it is understandable to feel intimidated by the process, it is also not realistic to take the first offer that looks right. While the average house will sell within four months, the sale of a business could take from nine to eighteen months. This is mostly uncharted territory for individuals who have spent a lifetime providing a service or product at a profit. It takes a team of experts to navigate a successful exit strategy.
The Steps to Consider When Planning Ownership Transition
Successful ownership transition is a process. It requires skills and behaviors that may feel counter-intuitive. It forces you to ask yourself tough questions that go to the emotional, personal and business aspects of your world.
Step One: Determining Personal Goals
It is not enough to say you want to sell your business at a certain point. You must clarify what that means to you. When creating your plan, ask yourself:
- Do I want a clean break, or do I want to be part of the organization I built?
- Is there a family member ready and willing to succeed me or should I look for an entirely different buyer?
- How much money will I need to pursue my goals and take care of my family once the business is sold?
- Am I retiring or moving on to something else?
- What is my potential “sell by” date?
These are essential questions and require thought. According to Jaqueline Gould (switchhinggears-retirmentlifestyl.com), who specializes in assisting people to redesign their lives as they prepare for significant transitions, one of the things that can sidetrack selling or succession planning goals is not being aware of their needs and goals in the next stage of life.
She recommends that you take the time to know what you want by:
- Studying and understanding your vision, values, interests, and strengths
- Understanding how those characteristics might shape your future post ownership goals
- Taking inventory of your capabilities
- Recognizing how your professional and personal interests align to your life roles and goals
- Developing a new Purpose: Values + Strength + Passion + Service =YOUR PURPOSE
- Identifying the positive emotions you expect to have because of your transition vision
- Defining your desired contributions and the impact you would like to create
As you begin to evaluate and weigh your options for your business, be aware that your situation can change. If you start this evaluation process early enough, you will have more options available.
Step Two: Establishing Your Business Goals
When you think through how you envision your future, you can see your way clearer to looking at your business as a means to an end. You should think through the options for your business. An advisor can help you weigh the options. The first thing you must consider is how your business can be sold. There is rarely only one option open to a motivated seller. While it is far from simple, most business owners have more options than they realize.
Here are the most common sales options:
Outright Sale - Simplest way to exit a business
Become a Capital Partner - The economics of your business often drives this decision
Keeping the Business in the Family - Identify who the qualified family members are and determine their willingness to continue the business.
Selling to Key Employees - Requires an understanding of the qualifications of the employee or employees hoping to succeed you.
This approach is the simplest way to exit a business and makes the most sense when the owner's family members are not interested in taking over the business, or the owner just wants to move on.
There are two ways to cash out:
- An owner can sell his stock in the company (or units if it is a limited-liability company). Stock sales tend to benefit the seller.
- An asset buyer purchases the company's physical equipment, facilities, and customers. The buyer also purchases intangibles such as trademarks and goodwill. In an Asset Sale, a buyer is protected against prior claims against the business.
Usually, the sale of small, closely-held businesses is an asset sale.
The next option concerns to whom do you intend to sell the business. Your potential buyers can come from surprising sources. They can be your employees, customers, suppliers, or competitors. While people buy businesses for many reasons, they fall into two groups: strategic buyers and financial buyers.
- Strategic buyers are interested in how your business compliments their existing business. These buyers could be one of your competitors or the owner of a more substantial business who wants to enter a new market or offer a new product. These buyers are willing to pay a little more for a good fit with their long-range plans.
- These buyers are interested in your company's profitability and stability. They could be companies or individuals with money to invest. Some will want a stable, well-managed company that requires little oversight while others may look to buy a business they can tweak to turn a profit.
Keeping the business in the family
If this is a goal, you need to consider who the qualified family members are and their willingness to continue the business. The challenge is to keep the needs of the business first, not just your personal goals or the wishes of family members. You do not want to create a permanent job for a family member; you want to determine if this serves the long-term needs of your business. Learning if your family members can own and lead the business into the future is the most challenging aspect of this option.
Selling the business to key employees
This option requires a long-term plan. It also requires understanding the qualifications of the employee or employees hoping to succeed you. There are other risks involved as well. You must consider the employee(s) ability to obtain financing, and the ability of the deal to go through. You want to minimize the risk of losing key employees if a deal does not go through.
Benefits of Selling to Key Employees
Owner does not have to conduct a search. However, this type of sale may result in a lower price than what an outsider might pay. Your advisor can help you determine if the economics work for both sides before entering into the legal aspects of an actual transaction. If successful, this can be a satisfying option for owners who have prepared their personal financial situations to allow them to take the inherent risk.
If this is a business goal of yours, a private equity firm can be the appropriate partner to help take the business to the next level. The economics of your business may allow you to gain liquidity and still provide you an opportunity to share in the growth of the value of the business. A private equity firm typically wants to own a business for a five-to-seven-year period. In choosing this option, you are committed to the business for that time, after which the final sale of the business will be completed. Again, this is an option with which your advisor can help you.
Which option a business owner chooses depends upon the nature and health of the business and the owner's intentions as to stay with the company or move on. Understanding all the options, and getting good advice from experienced business professionals, can make it easier to pursue the plan that best meshes with the exiting owner's plans and goals and the needs of the potential buyer.
Once you have established your goals, it is time to engage an advisor and create an active, viable plan. This plan can be revised as your objectives change, but the critical component is that the plan must be in writing and cover a variety of topics.