Death and taxes are the two certainties for everybody. If you're an entrepreneur, you can add a third.
You may have heard that there only two things in life that are certain - death and taxes. Well, if you own a business, you can add a third. You will transition ownership of your business at some point. That is a fact of life. The key factor that determines whether the transition is successful or not is having an exit strategy or a transition plan in place.
According to the new Price Waterhouse Coopers (PwC) study on family-owned businesses, 25% of all family-owned businesses will go through a transition of ownership during the next five years.
Why is this happening now? According to the Pew Research Center, 10,000 baby boomers reach retirement age every day. These baby boomers own 66% of the businesses in the U.S. - nearly 4 million companies in all. This means more than one million businesses will change ownership in the next five years. So, you are not alone out there, and you need to plan for the transition now.
According to the PwC study, the transition in business ownership will look like this:
• 52% will pass the business onto the next generation to own and run • 24% will pass the business to the next generation to own, but not run • 12% will sell to another company • 4% will sell to a private equity investor
How can you prepare for a transition? Successfully transitioning the ownership of your business requires planning, and that takes time. Don’t wait until you are too sick or old to run the business or until the business begins to go downhill. The ideal time to transition a business is when it is thriving, growing, and poised for success.
Transition to family members
You wouldn’t think of handing your son or daughter the keys to an expensive new car without ever having taught them to drive. Don’t expect success if you turn over your successful business to family members without preparing them to assume ownership and having a plan in place.
• You should train and coach your successors. Let them actually work in the business. More important, let them fail so they can learn what does not work. • When you retire, you should leave the company. Do not sit around the office second- guessing every decision. Retire, and truly allow the next generation to assume ownership. If you trained them properly, they’ll know what to do, and they may do it in a new way that is even better than the way you did it. • Set realistic goals and expectations. Reward accomplishments and applaud results. Stay tuned into new technology. You do not have to master it, but understand how it works and how it can help improve business operations or sales. • Outline clear financial terms. You may elect to sell the company to your family or even to employees. Just ensure everyone is onboard and understands exactly how the financial transition will be done. You should secure professional assistance to prepare for the financial transition, determine company values, etc.
Some of the most successful companies in America have been owned by families for generations. You can ensure a successful transition to family members. Plan the transition, and prepare the next generation to assume command.
Selling to another company
Twelve percent of family businesses will sell to another company. This still requires preparation. A few simple, yet very important steps include:
• Clean up your financials. If necessary, hire a CFO or accounting firm to assist you. • Create a complete management team. If you are missing key personnel, hire them. • Have a clear strategic focus. Communicate it clearly to your team and customers. • If a high percentage of your sales are tied to just a few customers, diversify your customer base. Add new services if necessary. • Resolve any pending legal or environmental issues. • Know your personal and financial goals--what you want to accomplish through the sale of your company. You will probably only get one shot at this, so get it right. • Identify and select a qualified investment banker who understands your goals and has the experience to help you achieve them.
Selling to a private equity group
Four percent of current business owners will sell to a private equity group. In general, this is the same as preparing for a sale to another company. The big difference is that the ultimate goal of any private equity group is to invest in your company, improve its performance, and ultimately sell the new company for a profit.
If anything, preparation is even more important in this situation, because the private equity group often wants to depend upon you and your management team to continue managing the day-to-day operations.
They will provide cash, management skills and potential customers or partners to increase profitability. The better prepared you can be for the sale, the easier it will be to manage the company after the sale.
Death, taxes and transitions--for business owners, these are the certainties in life. The difference between those who excel after transition, and those who flounder or fail, is preparation. If you are thinking about a transition, start planning now. It will happen, whether or not you’re ready for it.
DAVID LONSDALE built and sold three venture-funded companies before becoming president and co-owner of Allegiance Capital in 2005, which provides M&A financial services to middle market business owners. @MiddleMktMandA