“We started this business twenty years ago and now we’re tired and we want to retire.”
This is becoming a very common statement. Perhaps you have used a similar phrase.
Millions of Baby Boomer who’ve built small businesses over the past 30 years are due to change hands within this decade. About half will be a business succession within a family or to an employee. As a Business Broker I look for the best possible fit. Often the best fit is in an office down the hall. When I ask a Client if there are any internal candidates I’ll hear something like, “Our manager Fred would be great, but I know what I pay him and he couldn’t buy steam off a hot lunch.” In reality, with todays financing options and some good planning, there is a very good chance that selling to Fred could be the best possible fit and far less risky than selling to an unknown outside Buyer.
Let’s look at a good example.
“BLEND” is a Bellevue based graphic design and digital marketing agency. You’ve seen their brand identity work in ads, on packaging, websites, and many other visual eye catcher. Their clients are large and small from Ballard Organics Soap Company to Microsoft. Two partners founded the company as Image Ink Studio several decades ago. As the partners passed their 25th year they started to think more seriously about creating a planned exit strategy.
Established design firms often look for a merger candidate, but the best Buyer was already well known to the Sellers. Their star employee started with a company as a senior designer in 2005 and worked his way to art director in 2015. He was instrumental in keeping the company on the leading edge of digital technology and an excellent candidate to take over. The Challenge: with the young family and cooking jar savings, how could he buy a premium business with no money down? AND, how would the Sellers satisfy their goal of all cash up front for a risk free retirement? The answer is PLANNING.
An effective succession plan could take a tax year or two and might include basic practical steps like sending the Buyer to Quick Books classes or some other form of Missing Skill Fill.
In the case of our example a plan was set in motion that included these high points:
- Partial ownership for Chris from past sweat equity
- Deeper operational management involvement
- A history based business valuation with an ability to pay analysis
- Tax impact mitigation.
- Individual financial planning
- Bank finance pre-approval
Most of these steps were performed and completed within the 12-month planned closing target.
The transaction design capitalized on employee sweat equity as the down payment for an SBA Guaranteed Loan through a local community bank. The sellers were cashed out at closing and the Buyer’s no-cash down debt service was less than the un-replaced salary of the departing Sellers.
”BLEND” is re-energized and thriving in a new world of digital technology. The above illustrates only some of the elements and mechanics of succession.
What is the Most Important Factor for Successful Business Succession?
The #1 most important factor in the success of a business succession: The incoming owner must have the fire in the belly, the entrepreneurial spirit, a desire to be in charge of their own destiny and the fortitude to accept the associated risks. If you think the succession is being driven for job preservation or family pressure, think very hard about moving forward. Transitioning from employee responsibilities to a business owner mentality isn’t always the dream some folks are expecting. With the right planning, an entrepreneurial employee can absolutely be your best buyer.
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