My typical answer is yesterday! Especially given the fact, all business owners at some point in time will transition out of their business. Some of these transitions will be orderly and well planned. However, all too often many of these transitions will be poorly planned or be triggered by an unexpected event which leads to a hurry up sale that may not be in the best interest in the owner or their families.
The sell or transition of a company is typically the largest single financial event for the owner. This is a one-time life event that will enable the owner to monetize their years of hard work. Owners should be prepared to proactively manage the process in order to reduce inherent risk, uncover opportunities and maximize the final value.
Various studies are predicting that for the next 15 years there is going to be a tsunami of privately held business being sold, which will likely create a buyers’ market. It is estimated that approximately 20 million small businesses are owned by baby boomers and they will probably be exiting their business over the next 15 years.
Historical trends suggest that 60% of these businesses will probably be sold to 3rd parties. This means that there will be an average of 375,000 businesses being sold per year. Whereas, over the past 7 years according to Capital IQ this average has only been about 8,000. This coming tsunami will present huge opportunities and risks. Those businesses that are prepared will do just fine. Those who are not prepared could experience some nasty surprises.
However, since most business owners are totally engaged in running their business they often fail to plan for an orderly transition. Here are four simple suggestions for planning, preparation and execution of effective transition strategy.
- It is critical for the business owner to line up professional advice. A proven approach is to engage a quarterback that will help the owner assembly a team and successfully navigate this complex transition. The planning process for transition is very difficult. A team of professionals are required in the matters of tax, legal, estate planning for wealth management, financial management, insurance and a host of others. Finally there are emotional considerations a business owner must consider. A business owner requires objectivity in his planning preparation and the ability to let go at the time of execution. It is highly recommended that the owners give serious thought about what they will do after the transaction and plan for this also.
- Develop a formal transition plan. Adopting a proactive approach will provide the owner with a strategy for achieving and maximizing liquidity and a roadmap to deal with a variety of circumstances on his or her own terms. This transition plan will serve as a blueprint for testing and developing both business and personal objectives. It will assist the owner in carefully considering and identifying and prioritizing their financial goals and expectations. Transition planning is an action strategy designed to protect and enhance the business owner and their family by maximizing the value of the business of their business. Properly done, it places the business owner with greater control on the why, when and how.
- Conduct an early assessment of current value. This will help the owner determine whether the current value is aligned with his or her objectives for maximizing liquidity or whether value enhancing strategies are necessary to get the business to this valuation. External conditions can pose problems, the unexpected events outside of your control can either impact your transition plan either positively or negatively and the value of your company these must constantly be monitored in real time with systems and processes in order to achieve the desired objective.
- Develop liquidity options. This may vary or be limited based upon a number of external conditions. Having a plan will help the owner sort through these options and allow them to choose the option that best fits their desired goals this may also include delaying the sale.
The sale of your business is a major undertaking that require specialized knowledge. A great deal of preparation and thorough considerations must be evaluated during this process to avoid costly mistakes. Being proactive and managing your company’s sale in a controlled manner will give you not only an edge, but just as important – provide peace of mind.
Our mission at B2B CFO® is to help privately held businesses’ achieve a higher level of success. We accomplish this by working closely with business owners to clearly define their business goals and exit goals and then develop a plan to achieve these objectives. Our proprietary transition tracking system will monitor and track the progress of these objectives. This will provide the owner with a sense of control and enable them to concentrate on running their business rather than worrying about the sale.
Additionally, our proprietary business transition process will provide insights and strategies that will offer solutions for the owners benefit. Such as, is it better to sale now or build value for a future sale? Is the company ready for transition? Should all or just parts of the company be sold? What is the most tax-advantaged strategy? More importantly which strategies will achieve the best results in terms of meeting the personal goals and financial objectives of the business owner. Give us a call; it is never too early to begin planning for your eventual transition out of the business you spent years building.