Financial Freedom Through Business Transition
While many professionals focus on building their retirement funds and 401ks, as a business owner, you’ve likely poured your time, love, energy, and money into your business for years. While you may have saved assets for retirement, the majority of your asset is your business. So let’s take a look at how you can best set yourself and your business up for a successful transition.
The first is to realize you need a plan; an unfortunate fact is that 50% of business owner exits are not voluntary due to the 5D’s; death, disability, divorce, distress, and disagreement. To ensure you don’t become another statistic, you must first accept the fact that the perfect sale or transition will not likely “find you” or “fall into your lap.” A successful transition requires a purposeful plan and preparation.
Now there are options to consider for your transition. You may want to sell it to a third party, pass your business to key people or family members. The cash out might be a lump sum payment or an income stream from the company, or extraction of equity from your business amongst the many ways. You can negotiate these as you plan your transition, but only if you are ready and your business is ready.
Ensuring your business can support you financially means you may need to shift from running your business to providing your business with the necessary support to continue with your exit. One measurement of this is a business “valuation,” the business’s overall value calculated by multiple factors of your business and the market. You can do many things to improve your value before engaging with a valuation specialist or business broker.
Companies that are valued well typically share these traits:
- Owner independence – your time and talent are not vital in ensuring the business’s daily operations continue.
- Vendor independence – there is little reliance on a specific vendor for materials or services needed to support your business.
- Customer independence – you have various customers and do not rely on a specific customer or market segment to ensure your success.
A good rule of thumb to avoid vendor and customer concentration challenges is to make sure you’re diversified so that no vendor or client accounts for more than 10% of your business. A business that overly relies on the owner, a vendor, or a specific customer will likely see less than optimal valuations. Work to ensure stability in your business by varying vendors, customers, and decision-makers so that your business can operate with little need for your or a specific group’s involvement.
Steps to consider now, before you’re ready to pass the baton.
Whether you want to sell to an outside party or pass it to your successors inside your company, here are some steps to keep in mind:
- Engage Rockstar (aka Key Executives) employees now to take on more leadership so that the business becomes less owner-dependent
- Consider increasing income or creating golden handcuff plans to keep Rockstars engaged and vested in business growth. You can do this by setting additional bonus funds aside in a bucket for an eventual buy-out or set up a vesting schedule. Critical employees with skin in the game, being a shareholder, are typically more loyal and are harder to be lured by competitors.
- Understand that not all key employees will want to take the risk of owning a business. Some prefer the security of a consistent paycheck. You’ll need to ensure your Rockstars and their significant other are both part of this conversation as a discrepancy between the two can create challenges moving forward. The key is to highlight both the risk and reward, ensuring all parties have a clear understanding.
- Create an ownership/vesting plan where they can earn a portion of the business over time. Be sure to consult your legal counsel as this may require restructuring your non-compete agreement, business operating documents, and creating a shareholder agreement.
A good transition is a gradual process of setting you, your employees, clients, and possible buyers up for success. Start thinking about valuation and planning your transition at least 2-5 years in advance.
I work with a group of talented business transition professionals, each with our specific areas of expertise:
- CEO Coach
- Executive Recruiter
- Transition Specialist
- Business Transition Attorney
We work together to ensure you get the most out of your business, properly plan for your financial future, and create the transition you desire. If you’re interested in learning more about how we can help prepare you and your business for an eventual exit, fill out my contact form or call me directly.
Tel: (503) 654-7676 | Fax: (503) 653-7575 | www.bpgnetwork.com | 12901 SE 97th Avenue, Suite 240 Clackamas, OR 97015.
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