Most successful and profitable business owners eventually reach the point where they believe it is in their best interest—and very often the company’s best interest—to step down.
Once this decision is made, the next consideration is how to make the transition as smooth and successful as possible.
To achieve this, the owner must take a careful look at the options. Among them are:
- Selling the business to one or more family members
- Giving the business to one or more family members
- Selling the business to current employees
- Selling the business to a current co-owner
- Selling the business to a competitor
- Selling the business to another company that will retain the current owner or one that will dismiss the current owner.
Many issues will arise when selling a business, no matter who plans to purchase it and whether the buyer plans to retain the original owner as part of the sale. Some of these issues include the following:
Determining the Company’s Value
At one time, the formula used to appraise a contract cleaning company was three or four times its monthly gross income plus the value of property, materials, cars, and supplies included in the sale. However, several other factors can come into play, such as the age of the company, the longevity and types of customers, and the payment terms for the business.
Because there are so many variables, consider meeting with a business broker or valuation consultant and asking them to place a value on the business. If the company is large, it might be best to consider retaining a broker to handle the actual sale of the business. Either way, the broker/consultant may evaluate your business for less than you expect. This is fairly common.
Agreeing on Payment Terms
Along with not being aware of the business’s market value, sellers often overlook the fact that rarely is a business—especially a service business—purchased for all cash. Typically the sale involves a hefty down payment, and the remainder is paid out monthly for several months. This means the buyer must make enough money to pay the seller and make a living.
Squeezing potential buyers to pay too quickly or too much may result in an offer that’s less than the original asking price with greater risk that the entire sale will fall apart. Sometimes this happens after the sale is complete and requires the former owner to step in and take back the business. Often the company is not in as strong a position as it was when it was sold.
A better option, in general, is to offer the buyer more time to pay, along with better terms. In such cases, the selling price may be higher and the sale more likely to succeed.
Disclosure Requirements
When selling a business, buyers will want to know as much as possible about the business and finances before making an offer. Be prepared to share the following:
- Three years of tax returns or financial statements that accurately reflect the revenues and expenses of the company
- A current-year revenue and expense statement
- Deeds and mortgage statements if assets or property are part of the sale
- A listing of all supplies and materials that go with the sale and their appraised or estimated value
- If incorporated, the minutes and resolutions made by the board for the last two years, along with records reflecting ownership and those holding board positions.
Selling to Family Members
When selling a business to a family member, a number of pitfalls and problems can arise. Similarly, giving a business to a family member can present a range of problems—possibly more than selling it does. This is because doing business with family can be an emotional process.
A different set of problems may arise for new owners taking over a business from their parents. For instance, the parents may retain a strong influence on the day-to-day operations even though they are no longer active in the business. This can make the second generation hesitant about implementing change, and the business may stagnate because of this.
Additionally, first-generation owners may not have an agreed-upon timeline of transition. This can keep them tied to the company far past the time they want to leave—or past the time their children want them to leave. The transition period should include a timetable if the transition process is to succeed.
In order to make a successful transition from one family member to the next, consider the following:
- What conflicts may arise as a result of the decision?
- Will ownership of the business be transferred to one or more than one family member?
- Will the new family owner view him/herself as an employee or as a leader?
- Is the new potential owner familiar with how the business operates? Does he/she support its values and attributes?
- Will the new owner be able to work with the current employees and customers?
- If one family member is chosen to take over the business, how will other family members react?
Some family members may not have an interest in taking over the business, while others may be very eager to do so. You may need to tell everyone why you made your decision and that it was made in the best interest of the business.
Passing the Torch
For someone who has worked hard to build and grow a business, nurturing employees, finding ways to work with difficult customers and suppliers, dealing with cash flow issues, paying taxes, and navigating business regulations are just some of the issues that the business owner may have grappled with throughout the years. Deciding the best candidate to take over the business may be one of the last major decisions—and very likely one of the most important.
