Even though Baby Boomers may hold onto their businesses longer than other generations, they must face the reality that preparing for a business transition is an urgent imperative. Transitioning a business is a high-stakes endeavor, and for many, a once-in-a-lifetime process that requires significant focus, action, time, and money to do properly.
Beyond the owner and their family, the significance of a successful business transition is substantial. Failure to provide for the continuity of the business impacts not only an owner’s personal wealth, and that of their family, but also the future of all other stakeholders who depend on the business’s successful transition.
The continuity of a business affects employees, vendors, customers, charities, and the surrounding communities, for whom the owner provides jobs and social well-being.
What happens if the business does not successfully transition? The alternative is a business shut down. People lose their jobs. Families suffer. Communities suffer. Additionally, in many cases, the owner’s life work is liquidated for pennies on the dollar.
To successfully transition, a business owner must address three things: maximizing transferable business value, preparing financially for a lifestyle without the income from the business, and planning personally for what they will do in their next act after exiting the business.
Transition planning addresses several problems that prevent owners from achieving better transition succession rates and sustaining business growth.
In practice, here are some of the top hurdles that we see business owners encounter:
- Insufficient time: When owners do decide to exit, they realize they have not allowed themselves enough time to position their businesses for transition, minimize taxes, and maximize net proceeds. Thus, they achieve significantly lower net proceeds than expected. Exit preparation takes time regardless of the preferred exit option – sale or succession.
- Unplanned disruptions: Owners without a business continuity plan are unprepared when an unplanned event affects them and forces them into an exit that is not on their terms or timeline. Alternatively, some are fortunate to receive an unsolicited offer from a buyer. However, their lack of readiness prevents them from harvesting the value of their business in either situation.
- Unprepared for Sale: They are unable to complete a sale of the business to a third party because the business is unable to pass the test of due diligence to complete the sale—even a partial sale—to a third party. Private equity and strategic buyers are very seasoned and selective.
- Unprepared for Succession: Owners may also be unaware that they have eliminated their inside options, such as a transition to a family member or to employees, because their business cannot operate without them and is potentially undercapitalized, has insufficient cash flow or too much risk to succeed with an inside option.
Business transition planning is business planning. To transition their business successfully, owners intentionally plan in a way that holistically includes their business, personal, and financial goals. The actions they take (or fail to take) in the business today affect the company’s value at point of transition or sale.
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