Business owners generally don’t like to think about it, but eventually, a transition out of their business is inevitable. There are several ways to transition out of a business, including a sale to family members, employees, or to a third party. In this blog, we will focus on the sale to a third-party buyer.
Preparation and Timing
Running a business requires juggling many responsibilities and making important decisions that impact the future success of the company. It’s no wonder that many business owners fail to consider the best timing for them to transition their business. Sure, it’s a tough decision to make, but by carefully considering the following factors, the decision about timing will be made with greater confidence.
What are your exit goals and objectives? What do you hope to achieve? Do you have a plan for your life after transitioning out of your business?
Do you know the true value of your business and what key factors affect that value?
Have you put your company in the best position to achieve a successful transition?
Consequences of Not Being Ready
The Exit Planning Institute has done extensive research and surveying of business owners with respect to exit planning. The following are a few key statistics from that research:
12 months after selling, three out of four business owners stated they profoundly regretted the decision to sell. This was primarily due to the lack of having a plan for their life after the business.
Only 30% of all family-owned businesses survive into the second generation; 12% to the third generation; and only 3% to the fourth and beyond.
70-80% of private businesses put on the market do not sell!
Top Reason for not getting deals done is the business owner’s unrealistic expectation of the value of their company.
Goals and Objectives
As an owner, you should understand what you wish to accomplish by transitioning your business. By having a firm grasp on your goals and objectives, you’ll gain a much better idea of the right timing. Goals and objectives for selling need to be written down and revisited consistently. This process will help determine if there are any uncertainties about the reasons for selling. Uncertainty is a strong indication that more time may be needed to understand your post-exit goals.
Commitment and Dedication
Growing a business takes a great deal of time, effort, and energy. This needs to be something that the owner is passionate about doing. If you are finding a lack of drive in running your company, you might want to consider putting an exit plan in place. Buyers (and employees) can sense when owners are not motivated to run their businesses anymore, and that can adversely affect the selling price. Recognizing these changes in advance can help prevent this from happening. Similarly, succession takes a great amount of energy and dedication for the owner to properly groom his/her replacement(s). The owner needs to be as motivated as possible for the succession to be a success.
Achieving “Best In Class” Status
As an owner, you should want to put your company in the best possible position before exiting your business. Whether it is reaching a sales goal you set for the company or making sure your employees have secure plans following the exit, it is important to identify and successfully complete these action items. When the time comes to transition the business, it is important to feel you have accomplished everything you have set out to do. A succession plan can help identify and prioritize any loose ends.
Making the decision to exit is not an easy thing for a business owner to do. However, by taking these factors into consideration, you can have the confidence you need to exit your business on your own terms. This will lead to the creation of a successful exit plan and a smooth transition for both you and your business. If you have any questions, please contact us. You can also read related articles on our Lutz M&A blog.
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