Transitioning a business from the seller to the buyer
Without exception the sale of a business from the current owner or seller to the new owner or buyer is exceptionally difficult.
In simple terms, the difficulties for each party touch the ‘head’ and the ‘heart.’
For the seller, normally their greatest challenge is their ‘heart.’ They have been thinking and talking to their loved ones to decide if the time is right to sell their business. To help make this decision they look at their personal finances, the headaches they deal with each day, the new and upcoming headaches they see and if they wish to deal with them. If the answer is no and they decide its best to sell the business, they have to start a process that may or may not having an ending that will work for them. Once they start that process, it’s very hard to deviate from it as there are many things in play.
For the buyer, they have many challenges and most of them reach a final decision in the ‘head’ with the ultimate decision in the ‘heart.’ The buyer ‘head’ decisions are looking at financial statements, meeting and talking with important players that affect the business or guide the buyer’s decision making process such as landlords, lenders, attorneys, accountants and more.
After the buyer has made all the ‘head’ analysis they think they can do they are left with one final decision; is this what they really want to do. That decision comes from the ‘heart.’
The transition is the key factor in the future success of the business
The key factor to the continuing and future success of the business is the transition.
The new owner needs to understand how and why the previous owner operated the business the way they did and the reason behind their decisions. That’s not to say the new owner needs to make the same decisions, but if they can understand the reason behind previous decisions and make any changes carefully and with consideration, it will increase their chances of success.
Plus, an important piece that is over looked, if the previous owner and the new owner can work together with their decision making process, it means the best decision is made and that’s the best anyone can do.
What’s the role of the seller after the sale closes?
The buyer has so many items to address to close the sale of the business, often any clear role for the seller is not planned or made.
However, there are some things to consider.
Does the seller have a strong, autonomous decision making management team? Does the seller just make the “important” decisions and then delegate? Does the seller centralize any and all decision-making and then micro-manage to ensure the end result meets their needs?
The more the business relies on the seller centralizing any and all decision-making and then micro-managing to ensure the end result meets their needs the longer the buyer will need them to stay on.
Critical piece of a successful transition
A critical piece in the transition is the seller’s customer relationships. If the seller has many client contacts, the success of the transition will be positively having the seller ease out of the relationship and moving it to a new person be it the buyer or a key employee.
The best decision can take many twists and turns and depend on many items. How many client contacts does the seller manage? Are they day to day contacts or are they ad hoc or seasonal? In relation to gross sales, what is the value each contact brings and over what period of time? (The greater the value the more effort to make to preserve that client.) Is there an opportunity to re-contact with old clients to restore lost business patronage?
The worst thing to do is simply call each customer or send them a letter and announce there is a change of ownership unless the seller has run down the business and there is a need to start to build goodwill all over again.
In line with the last suggestion, putting a sign or banner out the front of the business to state there is a change of ownership is equally foolish. The buyer has just paid a percentage of the purchase price of the business for goodwill. A sign or banner announcing a change of ownership is notification to the world the seller has now “left the building” and so old clients could come in and meet the new owner or look for somewhere else to buy that product or service.
Buyer management style
An equally important part of the above is a critical question and that is, what is the management style of the buyer and will it complement the sellers?
We each bring our unique personality to own and operate a business. There is no better example than Steve Jobs. Steve Jobs started Apple with Steve Wozniak and was fired only to be asked years later to come back and run the company. That is, personality matters and so does their management style.
Best transition model
There are different transition models.
Here is a simple but effective model.
Phase one. The seller commits to work full-time as if there has been no change of ownership. During this time they transition to the buyer or the seller’s replacement their management knowledge of how the business operates.
Phase two. The seller continues to work in the business but now let’s the person they trained make their own decisions.
Phase three. The seller moves to a part-time role.
Phase four. The seller no longer comes to work in the business but is available for phone calls or one off in person visits to discuss a specific problem and/or review how the business is operating.
Communication and Trust
At the end of the day, a successful transition is about open communication and trust. The open communication allows issues to be addressed and resolved to the benefit of all parties. However, its only by trust that there is a willingness by all parties to do what they said or agreed they would do that means the outcome agreed during the open communication gets done.
A good legal contract states the intentions of all parties however the successful transition of the business comes down to the buyer and seller working together in good faith; not what is written in a legal contract.
Are you thinking about selling your business? Would you like to know the value of your business? If you would like more information please visit my website Business valuation.
For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.