Business owners transition to new ownership for a variety of reasons including lifestyle, age, health and wealth. While there are many grounds for passing the baton onto new owners, experts say there is a particular set of items all current business owners should know before making any big moves.
1. Preparing for sale
Specialists in the field say making preparations for a business transition should be something that a business owner does before anything else. Odee Ingersoll, director of Nebraska Business Development Center at University of Nebraska at Kearney, said arranging for a successful exit or business sale takes time. Just like the time an owner spent planning the start of the business years ago, owners need to spend a similar amount of time preparing for its sale.
“A typical period of preparation is around three years before a transition or listing for sale,” Ingersoll said. “It can be done sooner, especially in the case of owner illness, but business value often suffers.”
Long before an owner gets ready to sell or transition the business, Andrea Fredrickson, president of Revela, said preparing the leadership team to lead and run the business without the current owner is critical. She added that good strategic and visionary thinking, skilled critical thinking and culture development are very important.
“The stronger the leadership team and subsequent operational teams the more value if you’re selling and the greater the probability of the business surviving the transition,” Fredrickson said.
Andrew Sigerson, founder of Legacy Design Strategies, said owners must also think about what happens to their employees and make preparations accordingly.
“Will the new owners offer incentives so employees will stay?” Sigerson said. “The quickest route to failure for a new owner would be a staff exodus. So plan how you will tell them and when.”
2. Covering All Bases
There are many important decisions to be made when selling a business, which is why experts suggest working with a team of professionals to ease some of the burdens.
Regardless of whether a business owner is retiring or simply moving on to their next adventure, Fredrickson said aspects of tax, insurance, relationships and finance are constantly changing and apply differently to different scenarios.
“Depend on experts to be up to date and creative in ways that help accomplish your goals,” Fredrickson said.
Before deciding to sell, Ryan McGregor, consulting director at Lutz, advised meeting with a financial planner and an accountant to model out what life would look like after the sale.
“This is another piece of information that will help a business owner determine the right time to sell,” McGregor said.
Another big piece of the puzzle is figuring out how an owner will get paid — which is where having a CPA will come in handy. Sigerson said another consideration to make is whether the transaction will be considered a stock sale or asset sale.
“A stock sale is better for the owner typically because much of the purchase price will be taxed at capital gains rate,” Sigerson said. “An asset is good for the buyer, as they can depreciate but the owner may pay ordinary income taxes on the sale. A business succession consultant or attorney can really help here in structuring the deal to create the least tax.”
3. Knowing Your Value
Before heading into a sale, a business owner should have performed a valuation of the business twice according to Ingersoll. When planning begins, and again before the business is offered for sale or transition.
“It’s important to know the business’s value when planning begins so owners can focus on those things that actually add or detract from business value,” Ingersoll said. “Aggressive improvement is the goal to maximize the value of the business before it’s listed for sale. The second valuation is to confirm and capture these changes in business performance in fair market value. Sellers use this second valuation to establish an initial asking or transition price in negotiations with a buyer and even to support buyer financing.”
To negotiate a fair sale price, Sigerson said an owner must know how the market values the business. Again, a qualified CPA can help with this task.
“It might just be book value, meaning what is the value of your hard assets cash and accounts receivable minus your accounts payable and other debts,” Sigerson said. “The value may be multiple of your gross sales or net income. It may include blue sky which basically is your reputation and name.”
4. Transition Help
Too often, McGregor said a business owner will create an environment where the company’s success is reliant on the business owner’s continued involvement. If the business relies too heavily on an exiting business owner, the value of the business will typically be negatively impacted.
Fredrickson said it’s important to determine what a business owner will do or what they are willing to do once the sale is final.
“Sometimes owners are needed to transition information and relationships to the new owners,” Fredrickson said.
5. New Identity
Like selling a childhood home, getting divorced, or losing a loved one, transitioning a business is a significant life event that produces grief and disrupts habits and rituals. In between the valuations, transition discussions and estate planning, Merle Riepe, president of SOLVE, said it is important to acknowledge and address the emotional and mental impact of exiting.
“Some owners transition smoothly, but most experience anxiety, sadness or other negative emotions,” Riepe said. “Many business owners carry a strong identity with their business. For good reason — they poured their life’s work and money into it. There will be a sense of loss when it is over.”
Because of this, Riepe recommended enlisting professional support — a mentor or an executive psychologist — who can provide proven tools and techniques to reframe the situation and the counterproductive thoughts that accompany the exiting phase will permit the business owner to find a different type of happiness after the exit.
Many times, business owners are so focused on running the business that they don’t have a work-life balance. Once that work is gone, there is a large hole to fill, which can be the hardest part for former business owners, McGregor said.
“The suggestion would be to start planning your transition several years in advance to ensure you have a hobby, philanthropic work or business consulting to enjoy during the next stage in life,” McGregor said.
Preparing mentally ahead of time can help lessen the loss, according to Sigerson.
“We tell owners that selling your business will create a sense of loss for a while,” Sigerson said. “Know that ahead of time and try and take time to process it. Keep a journal. See a counselor. The extra free time will also be new and will affect your marriage and family.”
The Right Qualities
Being a good business owner boils down to possessing a combination of qualities that ultimately lead to success. Believing in oneself, as well as having the ability to persevere when things are difficult are key qualities, according to Riepe. Drive, or passion, is equally important.
“As a business owner your business is always on your mind — perhaps not the whole business, but some part of it,” Riepe said. “That need to achieve and continuously improve is consistent in the available research on entrepreneurship.”
Additionally, Riepe said adaptability is a must, as the first idea or original intent of the business rarely sustains through the lifespan of the business.
“If you’re open to multiple options, there are several pathways to success,” Riepe said. “If you’re stubborn about one ‘right’ way, you limit your course to success.”
Integrity and ethics should always be top of mind for a good business owner, according to Fredrickson, who said things will get tough now and then and knowing and doing the right thing is critical. Fredrickson also said being flexible is a great trait to possess.
“Knowing that you have goals and being fiercely dedicated to them, while knowing you’ll need to do some course correcting is vital,” Fredrickson said.
An individual who understands finance and how to use others’ money and leverage money to build a business would make a great business owner. Being creative, responsible and having a positive perspective are also great qualities, Fredrickson said.
In McGregor’s experience, a good business owner has the desire to learn and understands their strengths and weaknesses. Another quality is being able to manage multiple personalities and make sure everyone feels heard.
“You will create a strong culture if the employees feel like they have an impact,” McGregor said.
Sigerson said having a vision and a strong sense of leadership are a couple of qualities that good business owners boast.
“A truly successful business owner moves away from driving all the sales to being one who hires and trains others to be successful,” Sigerson said. “That leverage is the key to growth.”