Business owners put everything they have into making sure their operations are prosperous and profitable. They deserve the opportunity to reap the rewards of all their hard work when they are ready to ride off into retirement. At least that’s the plan right? So how do you accomplish this?
We have seen a number of scenarios play out over the years when dealing with the succession of private businesses and the key is to make sure there is a plan and team in place to help facilitate the process.
We posed a few questions to our Partner of Corporate Advisory, David Laycraft P.Ag., MBA, CMC, CBV, CF, CDFA, that you should consider when making this move.
David has over twenty years of diversified experience working with privately-held businesses, and regularly assists clients in identifying, measuring, growing, and realizing business value.
David can be contacted at (403) 750-7685 or email@example.com
When do I need to start planning the transition of my business?
Advanced planning is required to support a premium valuation for your business, regardless of who the “buyer” might be. If you compare selling a business to selling a house (something most of us have had experience with), there are generally three levels of upgrades that can be undertaken:
- House Upgrade #1: Painting. Comparable cosmetic-like changes to your business could include activities such as formalizing your business processes into an “Operations Manual” or finalizing that “Employee Handbook” you have been putting-off. These type of upgrades can probably be completed in 3 – 6 months.
- House Upgrade #2: Renovations. These mid-level changes often allow for de-risking parts of your business, such as formalizing your key supplier or customer relationships with contracts or developing an integrated marketing and business development program. These fixes generally take 1 – 2 years to develop, implement and measure results.
- House Upgrade #3: Infrastructure upgrades. These are the longer, systemic business upgrades that, more often than not, deal with people. Recruiting, hiring and retaining key staff – whether it be for new positions or to replace yourself or other long-tenured staff nearing retirement – or mentoring and training your current leaders so that they develop to their full potential, can take the longest time (i.e. 2 – 5 years) to implement, but often provide the highest return.
So, while we generally tell business owners that they should start preparing at least two years in advance of a transition, the actual amount of time is highly dependent on the type of upgrades that are required.
What if I still want to stay involved?
Buyers almost always want the previous owner to assist with a transition period (generally 1 – 3 months) once the business has been sold. Beyond this transition period, the type of buyer often dictates their desire to continue having the previous owner involved:
- Strategic buyers – these are competitors, suppliers or other industry participants – may have executives ready to replace the previous owner or may want to take the business in a different direction, which often precludes the involvement of the previous owner.
- Financial buyers – these may be private equity buyers or investors looking for returns or diversification – may be very interested in retaining the previous owner to continue growing the business.
As part of the pre-sale planning, the owner should conduct the soul searching required to determine what their post-closing desires and expectations are. This knowledge will also help shape their go-to-market strategy and prepare them for discussions with potential buyers.
Who can I pass my business on to?
We generally see 3 main categories of potential buyers for privately-held companies:
- Family members – often sons or daughters, but could also be brothers, sisters, nieces, nephews or grandchildren.
- Management – often referred to as an “MBO” or management buyout. This could be a single key employee or a group of managers.
- External sale – these are sales to either a strategic buyer (competitors, suppliers or other industry participants) or financial buyer (private equity firms or other investors).
A thorough planning process will analyze and rank these three categories in relation to the goals and expectations of the owner. But in general, the price paid increases and the go-forward risk for the previous owner decreases as you move down this list of buyers.
Do I need to consider taxes?
As it is the after-tax proceeds that all investors are ultimately interested in, the tax impact of the transaction is very important. But we are also advocates of the old adage, “don’t let the tax tail wag the investment dog” – which means that tax is only one of many aspects of your transaction, and fixating on any single aspect can lead to less-than-optimal outcomes.
Don’t get me wrong – properly structuring the transaction is critical in minimizing the tax impact. However, provided that we have a proper amount of planning time, our succession planning begins with gaining a strong understanding of the business and the owner’s current financial situation and future goals. This will allow us to then develop alternative scenarios, for which the Catalyst tax team will develop structures that address all tax-related issues that the owner will face.
Is there a right time to sell?
We believe the “right” time is when all or most of your succession goals and objectives are met at the same time as both internal and external conditions are favorable. Of course, this requires going through a detailed planning process prior to the sale, which will address issues such as:
- The current value of your business and ways to increase this value.
- Alternative sales and consideration structures, including tax implications.
- Developing the go-to-market strategy and the list of potential buyers.
- Personal and family wealth goals and strategies, both pre- and post-sale.
Do I have to tell my employees?
This is always one of the biggest concerns that business owners have – not only in terms of confidentiality, but often because of a sense of loyalty to their staff that were an important component in growing the business and creating value. While the circumstances surrounding every business is unique, our general advice is:
- Try and keep the news of a potential sale secret for as long as possible.
- As the process unfolds, you may have to confide in a few of your key staff so that they can provide assistance with the sales process.
- Utilize properly-drafted confidentiality and non-disclosure agreements with those you enter into discussions with (both buyers and staff), but realize these are not foolproof.
- Be prepared for a confidentiality-breach or for the rumors to start – having an “emergency response plan” developed in advance will help you address this uncomfortable situation in a timely-manner should it be required.