Having a Business Transition Plan
If you plan to sell or buy a business, should you have a transition plan?
The process to sell a business is not a quick and easy matter. At the moment it is taking about 8 months to sell a business if it sells. This means the business sits on the market for about 6 months before finally getting an offer from a buyer. Once the negotiations finish, due diligence commences and closes and escrow opens and closes we arrive at the 8 months. And this applies if the business sells. Depending on which statistics you read, approximately 75% of businesses never sell.
As the entrepreneur looking to sell and transition out of being a business owner, it’s not a quick process, and it is never too early to plan one too. It can even drag on if the buyer wants the seller to continue in an active role in the business in some capacity. At the end of the day, however, it all needs to make sense to the entrepreneur and the best way to do that is to build a transition plan.
What should be included in the transition plan?
A transition plan can overlap with an Exit Plan. An exit plan is essentially a process to exit business ownership. A transition plan is a strategy to manage the protection and eventual transfer of assets or stock in a proactive, tax-efficient manner. Essentially an entrepreneur can have 5 types of assets. These are Personal Property, Real Estate, Business Interests, Insurance Plans, and Employee Benefits.
Personal property includes savings, stocks, bonds, and personal effects. Real estate includes both residential and commercial property. Business interests include the business legal entity such as a corporation, partnership, or LLC. Insurance plans include life, health, and annuities. Employee benefits include pension, 401(k), IRA, and stock options.
Creating a Transition Plan touches all aspects of an entrepreneur from the obvious personal financial need and therefore personal security to matters such as tax and perhaps not always recognized, the emotional needs of the entrepreneur. At all times the emotional needs of the entrepreneur are always exposed. Things like divorce, health issues, family issues, personal safety, and disability are always looming. The pressure of the business from customers, suppliers, landlords, employees, government agencies, lenders, and a myriad of others constantly keeps an entrepreneur thinking, planning, and reacting.
When transitioning the ownership of a business there are many options. An outright sale to a buyer is one of the most obvious but there are 4 other possible options. These are selling the business to the employees through an ESOP program, selling through a Charitable Trust, transferring to a family member, and selling to a partner. In certain circumstances, the owner could take the business public and sell his interest via an Initial Public Offering or IPO but most businesses would not meet the criteria including handling the associated costs.
A quality Transition Plan is all about success. Its ultimate goal is to ensure that the business and the owner move from one state to the next. The best analogy I like is that it’s like juggling two snowflakes. Every snowflake is unique because of temperature, the absence or inclusion of a piece of dirt, the number of water molecules, spins of electrons, hydrogen, oxygen, etc. So too is a business and its owner. To preserve and maintain the business and protect its uniqueness it must be treated carefully and properly. The same applies to the owner. The owner can live without the business and the business can live without the owner as long as proper care and attention are given to each so when the next owner comes along with their uniqueness, like another snowflake, it has to make sure it can mesh with the business and both be successful.