Preparing to Leave
There are a handful of questions that nearly every buyer asks when first looking at a business, and one of this is: “What does the owner do?” They want to know whether they can replace the owner, so clearly one of the most important ownership transition planning steps for a small business owner is planning for the day that owner will no longer be there. The business owner has perhaps been there from the beginning, is the leader of the organization, and oftentimes performs the most critical functions of the business. Most organizations are built on sales, and it is not uncommon for the business owner to be the chief rainmaker and customer contact person. As organizations mature and grow, key employees will necessarily take on sales, customer service, operations, and other key roles. Generally, an organization will be healthiest and best prepared for sale when the owner has delegated key tasks to managers and employees.
When asked the question, most business owners will readily admit that they are critical to business operations. This is not just an over-estimation of their value to the organization, it is generally true. The business owner contemplating a sale must look at the business from the viewpoint of a prospective buyer. Will the average buyer outside this industry doubt their ability to step into the owner’s shoes and perform the owner’s role? Typically, the interested and successful buyer will have relevant transferrable business experience, but not necessarily in the same industry or with the same skill set as the owner. Should the marketing of the business be limited to only those persons who have the same skills, or who have experience in the same industry? This limited market exposure may be necessary for some businesses or in situations when time does not allow for preparation, such as in the event of an owner’s unexpected death or disability, but generally a small pool of prospective buyers will not yield top value for a business.
Managers and employees who will remain with the company after the sale are critically important to most business sale transactions. A courteous and competent staff of employees is important to the value of any organization, but even more important are those key employees who fulfill critical roles. In a manufacturing business, the owner will typically have a comprehensive knowledge of the manufacturing processes. However, there may also be an operations manager who runs the shop day to day, and who will desire to remain with the company post-transfer. If the operations manager is the selling owner’s son, daughter or other close relative, the situation will raise red flags of concern for prospective buyers as they consider whether the owner’s family member will truly desire to continue their employment long-term, and on what conditions. Little difficulty should be expected in replacing financial management functions, which are most often performed by an employee or outside accountant anyway, but sales and operations redundancy will be critical. The critical point is this: For a business to obtain maximum value, it must be able to operate reasonably well apart from the owner. Accordingly, a key step in preparing for sale is to come up with a plan to replace the owner.
Beyond the filling of his own shoes, the business owner preparing to sell should consider his motivations and personal preparedness to step aside in favor of a buyer. A buyer may desire to retain the services of the selling owner for some time, and typically a short-term consulting period is required, but most of the time the owner will be separated from the business shortly after the sale. For some this will be a welcome event, but for many others the adjustment from working all the time to not working at all can be a frightening, or at least uncertain, transition. In our experience if an owner is not committed to sell and reasonably certain of future plans, whether those plans involve retirement or some new business venture, then the sale is unlikely to happen. Start dreaming now about the things you will do with your time after the sale – the people you will visit, the places you will see, the activities you will enjoy. Perhaps it’s a new, part-time business or consulting venture that allows time for other things in life that are more important than business, yet provides an outlet for creative energy and skills. Whatever it is that you plan to do next, be certain of your motivation for selling your business when the time comes.
A final point on the topic of preparing to leave, do not wait too long to get started. A business is at its highest value when the future looks bright, and conversely a business in decline will fetch a depressed price. Buyers are interested in the future of a business, not the past. While it is true that any buyer will look at historical performance as a predictor of future performance, the reality is that a business in present decline is difficult to sell even at a lower price. Buyers and their lenders will want to see year-to-date financial statements, and any evidence of declining sales or revenues will raise questions that should be answered in advance. Accordingly, it is important to plan for the sale of the business while it is still going strong and prospects are good, and to ensure that the business continues to operate well throughout the business sale process.