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Transitions

When successful business owners reach a certain age they may no longer wish to work as hard as they did when they were younger. They don’t want to quit the business – they are having too much fun for that – but they would like to transition over time to a less active role. Owners should ask themselves “if you had a magic wand, what would my role in the business be ten years from now”? The sooner owners identify their transition goal, the easier (and more likely) it will be to reach it. The path to that vision is not easy, but it is simple. To reach that goal – to transition successfully – owners should:

  1. know what they’ve got;
  2. (if necessary) grow what they’ve got; and
  3. know their transition options.

Every business is unique. Every owner is unique. It comes as no surprise, therefore, that every owner’s transition goal is unique. But every transition plan involves considering the most common options, each of which has pluses and minuses:

Sell To An Outsider

Selling the business (typically to a competitor you already know) gets the most dollars – but there are negatives. Taxes for one: in an asset sale (the purchase method buyers prefer) taxes can wipe out 50% of the sale proceeds. Secrets revealed for another: prospective buyers want to know what you pay your people, the names of your best clients and more. You’ll have to tell them – with no guarantee they’ll make an offer (let alone an acceptable one). Even if a business is saleable (50% are not), selling to an outsider is not always the best option.

Sell To An Insider (Management Buy-Out)

In a management buy-out the buyer (a child or key lieutenant) knows your business and is someone you trust. That’s good. What’s bad is the buyer often has no cash, so you’ll have to take back a note. Better watch out! Good employees often prove to be bad entrepreneurs, so be prepared to take back the business in a couple of years, having been paid nothing and now with your business on its deathbed.

Sell To An ESOP

When they work, employee stock ownership plans let owners take cash off the table with nice tax breaks. But very few businesses fit the ESOP profile. There are 4.9 million American businesses with employees but only 11,000 ESOPs.

Take Venture Capital (Private Equity Recapitalization)

Selling 80% of your stock to a venture capital firm brings immediate wealth, no question, but there are strings attached. You are no longer the boss but an employee – and you report to an impatient board of directors. Your perks (and often long tenured employees) disappear in the all-consuming quest to grow profits quickly.

Give It Away

Owners give away their businesses to create a family legacy, to reward key employees for decades of effort, or for many other reasons. The downside is: no cash from the transaction. For most, therefore, this is not a viable option.

Lose It In A Fire Sale

Of the six ways to cash out, this is the one with absolutely no arguments in its favor, only arguments against.

Every business is unique. Every owner is unique. No surprise, therefore, that the exit option best for you is not necessarily the obvious one. Before you select yours, get an Exit Options Analysis to learn the pros and cons from someone without a vested interest in having you select theirs.

SPARDATA’s Transition Options Analysis product includes the following:

  • An interview of the business owner by a credentialed SPARDATA analyst to better understand the business and the owner’s personal and business goals.
  • A memorandum identifying which of the six exit options is a possibililty (given the size and condition of the business) and the pros and cons of each viable option.
  • A conference call with the owner and advisor on the pros and cons of viable options.
  • Conference call(s) with subject matter experts who specialize in each option.

Ask to speak with a SPARDATA Value Advisor for details on this service.