Only 3 things can happen to a business once it’s been put on the market to sell.
- It sells internally.
- It sells externally.
- It closes and the value is lost.
The more planning you do, the more value you’ll be able to transition.
The more buyers you identify, the more cash you’ll get for your business.
Let’s talk about the art of finding a few leaders with enough Fire In The Belly to take your company to the next level:
“We started this business twenty years ago and now we’re tired and we want to retire.” This is becoming a very common sentiment. Perhaps you have used a similar phrase.
Millions of Baby Boomer owned small businesses are due to change hands within this and the next decade. About half will be successions within the 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 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.”
Your Successor must have Fire in the belly to succeed!
But with good planning, there is a very good chance that selling to Fred could be the best possible fit and far less risk than selling to an unknown outside Buyer.
Let’s look at a good example.
We represented 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 catchers. Their clients range from small Mom & Pop company to Microsoft. Two partners founded the company in 1977. As the partners passed their 30th year they started to utter phrases like the first line above.
Established design firms often look for a merger candidate but the best Buyer was already well known to the Sellers.
Their senior designer started in 2000 and worked his way up to art director in 2007. He was instrumental in keeping the company on the leading edge of digital technology and an excellent candidate to take over. But with a young family and cookie jar savings how could he buy a premium business with no money down? Also, 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 couple of tax years or longer and can include basic practical steps like sending the Buyer to QuickBooks 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 the Buyer 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 used the Buyer’s sweat equity as the down payment on an SBA Guaranteed Loan through a local comuinty Business 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.
The Company is reenergized and thriving in a new world of digital technology.
The above illustrates only some of the elements and mechanics of a succession.
Now I’ll share the most important factor in the success of a 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. Successions for Job preservation or driven by family pressure have a very high failure rate.
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