Many business owners get to the end of their careers and then start thinking about how they are going to transition to the next stage of their lives, but also monetize the business they have spent years creating. They often expect that money from the sale or transition of their business will help to fund their retirement or at least support part-time work of some kind. It’s a big expectation.
Answering the question, “How do I plan for ownership transfer of my business?” is very personalized to each owner and business. There are actually five major questions to answer long before it’s time to exit.
Who should my business transfer to?
This is a very difficult question for many business owners. If they have built a business and they want to pass it down a generation through their families, there must be next-generation family members who have both the skills and the desire to carry on the business. It is a question that is very hard to answer as a parent, but the future of the legacy depends on it. If a child is not able to succeed in the current environment and change for future market conditions, the business is being set up to fail.
As an alternative, is there a strong core employee group to sell to? If not, the business owner may need to look at an outside buyer to make sure that the business receives the value it deserves.
What is the value of my business?
Is the business value based mainly on “me?” If the value of the business is tied up in the reputation of the owner, and not the product or process that the business produces, then the potential value is greatly decreased without the owner. A top regional real estate firm or a top sales consultancy derives its value mainly from reputation and the people at the firm. Owners with high name recognition should begin to transfer relationships and build proprietary processes that can be sustained without the owner’s involvement.
What tangible and intangible business assets are transferable?
To provide the greatest value for an enterprise, the value must be transferable. Are you a plumber who has implemented a great process to provide fast and efficient service? Are you an architect who has implemented cutting edge technology to reduce time and cost while providing an excellent product? These are the types of things that will increase the multiple that a purchaser is willing to pay for the business when you as the owner are ready to transfer out.
If you are keeping the business “in the family,” look for innovation that will allow the family to thrive as the world continues to become more competitive. Consider assets such as key customer relationships, technology and processes that a buyer could use to sustain or grow the business.
How do new customers or employees affect business value?
It’s great to think that you have a business that is very saleable/valuable, but every new job/project should be looked at with the goal of increasing value. If we spend all of our time finishing tasks in the business, we will never have time to look at the future value of our business. At least annually, the owner and management group should get together to make sure that they are still building value for the firm with every new employee, customer or project.
Why does my lifestyle affect selling my business?
Too many times, owners are focused on their business and then they sell and don’t know what to do. For the owner who has poured his blood, sweat and tears into a business to suddenly not have that purpose, it can have a devastating effect. The owner needs to plan the next stage. Just saying that you are going to “retire” isn’t enough.
Are you going to get more involved in your community, expand a hobby or travel? Have a plan. This plan will also determine the multiple that you may need to derive from the sale of your business to sustain a preferred lifestyle or achieve personal and charitable goals. In the words of Old Dominion – “Life is short, make it sweet.”
If you need assistance imagining life after business or determining the future value of your business and timeline for ownership transfer, contact Tom Terry, firstname.lastname@example.org or 631-727-3626.