07 Jan The Importance of a Transition Plan
Every business owner will eventually ask this question. I’ve built this successful business, but I don’t want to run it forever, so now what am I going to do? The easy answer is you have three choices.
- Sell it to someone you know.
- Sell it to someone you don’t know.
- Close the business.
That’s it…those are the only choices, no more or no less. The fact is that many owners do not stop to ask the question until it’s too late. What do I mean by that…well while the answers to what to do with my business are simple from a choice matter, the fact is that actually implementing one of the choices, and maximizing both the timeline and the return on your investment are another story.
When is the best time to start the process of transitioning…ideally atleast 3-5 years from when you want to be completely out of the business. In this post I will briefly touch on the three choices, and the issues associated with all of them.
Let’s say you want to sell to someone you know. Perhaps it’s your family members, or a trusted employee or a group of employees. While often this seems like the easiest option, it is often the one with the most issues. How will they pay for the business? Will it be seller notes, bank debt, friends and family financing, or a combination of the above. I was having a conversation with a perspective client, and when I asked about his transition plan, he told me he had it all figured out already. He was going to sell his business to his daughter and one of his trusted employees. I asked how they were going to pay for it…he told me he was going to take a seller note and they would pay him over time. My next question to him was how much they were putting down. He told me they were not coming up with any cash…I then asked him how he was planning to pay the tax burden on the sale. What do you mean he asked me? Well, how are you going to pay the 20% capital gains tax on the sale of the business. His eyes widened, and after a few moments he said…I did not think of that. Needless to say, not only had he not talked with someone like me to help with strategy, he had not even had a conversation with his tax professional. Aside from the tax issues, once you issue seller notes, you lose all control, you are now holding what could very well turn out to be worthless paper, and a promise to pay as the buyers, as well intentioned as they may be, run the business into the ground. We can discuss a better way to structure this deal over a period of time with gradually allowing people to buy into the company through bonus and earnings, and transitioning the business, but this takes time.
Let’s say now you want to sell to someone you don’t know. So you think I do the deal, walk away with my cash, and live happily every after. That is very much the exception and not the rule. So much of the value of the business is you and the trusted staff you have built. Without you and them…what is the new owner buying? What does this mean, well it probably means that you will have an earn out period where you are paid out over a period of years, based on milestones hit, and work you continue to do as you transition the business. So the potential pitfalls on this deal, you are now working for someone else, you are no longer the boss. You need to stay in order to get your payout…which means your timeline may be longer than you anticipated, and the earnings less than you wanted if say the business hits a downturn. We have some strategies to mitigate these types of deals. However, you need to plan for them. That planning takes time.
Lastly, let’s say you are just going to close your business. Aside from the emotional toll of closing the business that you have built, you have all the issues of how to shut it down. You may feel loyalty to long term clients, do you need to help them find a new home? Depending on the business you need to terminate leases, sell inventory, equipment, furniture and fixtures, etc…. What about your loyal staff…do you feel obligated to help them find a new job. Are you prepared from a tax standpoint? We have ways to help plan for this scenario as well.
Aside from what I discussed above, I didn’t even address the matter of the financial records of the business. Do you have clean and accurate financial statements? Three year’s worth of good records? Clean and accurate statements are important, the more questions and explaining that needs to be done, usually equals a lower starting point and a lower ending point. Needless to say, three years of good statements, means atleast three years of planning.
Now with all of that said, are we ready to have a serious discussion about next steps, and your future and the future of the business? Our first conversation is free. Isn’t it time to invest in your future.