Thinking About a Transition? Here’s What You Need to Know
Negotiating the Price Gap Between Buyers and Sellers
June 19, 2020
Seller Financing: It Makes Dollars and Sense
July 11, 2020
Running a business can be exciting, scary, and sometimes boring. If you’ve lost interest or are ready to move onto something else, a sale might give you the adrenaline jolt that starting a business once offered. The truth is that most owners are not fully prepared to sell, and have highly unrealistic expectations. The Ext Planning Institute’s State of Owner Readiness Survey in 2013 revealed that the majority of owners (76 percent) hoped to transition in the next decade. Nearly half (48 percent) said they would like to move on in the next 5 years. So why do 70 percent of businesses put on the market never sell?
The simple answer is that a transition requires thoughtful, knowledgeable planning. The skills that helped an owner thrive in business may actually undermine their ability to sell. They might be the face and lifeblood of their business, but buyers don’t want an owner-dependent company. They might know how to manage their team, but have they established a team that can work under new leadership?
The Owner Readiness Survey also found that 75 percent of owners were unfamiliar with all possible options for exiting their business. Chances are, you’re among them.
A mere 30 percent of family businesses persist into the second generation, with just 12 percent surviving to the third. Only 3 percent truly last for generations, persisting to the fourth generation and beyond.
If you’re hoping to leave a legacy to your kids, to build something meaningful for your family, the time to plan is now, whether you’re just starting your business or one of the many owners who think an exit might be on the horizon. Ultimately, sage advice from exit planner is going to be the thing that separates the wheat from the chaff.
Some other things to consider as you weigh your exit options include:
- What is the best transition strategy? If I want to leave this company to a family member, is there someone in my family who has the skills and experience necessary to see this company into the next generation?
- What does a successful transition look like for my business?
- What are the key barriers my business currently faces to successfully transitioning owners?
- What would an outsider see looking at my business? Is it a risky venture, or one that is a well-run safe bet?
- Where are my business’s best opportunities for growth?
- Can my team run the business in my absence? If not, what I can I do now to reduce owner dependence?
- How much time do I have before I need to exit? How much money do I need to leave my business with?
- Are there alternative exit options? Am I willing to consider selling to a competitor?
- If I hope to leave to a family member, how can I begin grooming them now for a leadership role?
- How can I separate family from business relationships when transitioning my company to a family member?
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Selling the shares you hold in a company vs. selling the assets out from the under the company can make a big difference in taxes, who assumes certain liabilities and what happens to certain contracts. There are challenges with each, such as the assignment of customer agreements with an asset sale, and change of control clauses in stock sales. We’ve known Ney Grant, an M&A Advisor on the west coast, for many years and he has recently released what looks to be a quality eLearning program (a series of 25 videos and materials) on how to sell your middle market business. He has shared his video with us on Stock vs. Assets sales which describes, in very visual terms with a stack of cash and toy tractors, what really happens in a stock sale vs. an asset sale and why buyers typically prefer asset sales.