By Valerie L. Vaughn, MBA, PhD, Certified Business Intermediary and Mergers and Acquisitions Professional, Apex Business Advisors
Many business owners believe that when it comes time to retire, they’ll sell their business to a key employee or younger family member. It’s a nice thought, isn’t it? Of course, you want to sell to someone who knows the business well and will care for your clients and employees as well as you would.
It’s nice, but if this is your thought, you need to wake up and smell the coffee. The hard truth is that selling to an employee or younger family member is great in theory and difficult to turn into reality. Some of the top reasons why selling to an employee or family member doesn’t work well are:
- The successor you had thought wanted to buy your business doesn’t really want it.
- Your successor cannot afford to buy your business.
- Your successor hasn’t been properly groomed to take over when you leave.
Frequently, business owners wait until just before they are ready to exit to look seriously at the logistics of selling their business. By that time, it’s too late. The best piece of advice I can give to help you successfully sell your business is PLAN; DO NOT WAIT.
If your hope is to sell to a younger generation employee or child, here are three big steps you’ll need to take early to prepare for a smooth transition.
- Confirm. Have an in-depth conversation with your hoped-for successor. Do they really want the business? Or is it just a nice idea? Why do they want to own your business? How do they imagine it will impact their lives? Talk about what owning a business will mean. Discuss the challenges as well as the perks and be frank about the risks of owning a small business.
Plan for sale to an external third-party buyer. If your chosen successor goes the distance, you’ll turn over a well-prepared business and if they don’t, your business will be attractive to other potential buyers. A business broker or investment banker can help you find multiple buyers so you can choose one you like and trust to care for your business, employees and customers.
- Can they afford to acquire? Business owners planning to sell to a younger generation employee or child rarely think about the amount of money their buyer will need. A business can be started with very little cash, and growth can be funded organically. But the acquisition of a mature, ongoing concern will require access to capital and frequently more than the younger generation can manage. In other words: It takes a lot of money to borrow a lot of money.
A rule of thumb is the buyer should have 25 percent of the acquisition price and many younger buyers won’t have it. This should not come as a surprise. Younger buyers haven’t had time to accumulate significant wealth and are typically repaying student loans, buying homes, raising children and saving for college. But there are ways to help them access the capital they’ll need without requiring you to finance the acquisition. Work with your intended successor, your wealth advisor and a bank to plan ownership transition in a manner that meets everyone’s financial goals.
- Are they ready? Your next generation successor is younger and has less life and career experience than you. They may have done a great job in a variety of company roles but look closely at whether or not they are ready to step into THE leadership role.
Prepare your next-generation successor to take on your role when you retire. Make sure they get the training, education, mentoring and hands-on experience they’ll need to operate the business successfully when you are no longer involved.
If you want it to go smoothly, plan for your eventual exit. Talk to your potential successor and your professional advisors (accountant, attorney, wealth manager, business intermediary). The minimum planning time suggested is three to five years but it is never too early to prepare your business for sale.
If you’ve planned and your life situation changes suddenly, or opportunity knocks, you will have an attractive business that buyers want. And, everything done to prepare your business for sale, to make it attractive to a buyer, will make it easier and more profitable to own.
Valerie L. Vaughn is a certified business intermediary and certified mergers and acquisitions professional with Apex Business Advisors, an Overland Park, Kansas, firm that assists with business sales, mergers and acquisitions. She is a member of NAWBO-Kansas City and currently serves as Immediate Past President. Valerie can be reached at [email protected].