Without exception, the sale of a business from one owner to another is a complicated process in California.
In simple terms, the difficulties for each party touch the ‘head’ and the ‘heart.’
For the Seller, their most significant challenge is often 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 consider their finances, the daily headaches they face, and the new and upcoming challenges they anticipate. They also evaluate whether they are willing to deal with them.
If the answer is no and they decide it’s best to sell the business, they must initiate a process that may or may not have an outcome that works for them. Once they initiate that process, it’s challenging to deviate from it, as many factors are at play.
Buyers have many challenges, and most of them reach a final decision in the ‘head’ with the ultimate decision in the ‘heart.’ The Buyer’s key decisions involve reviewing financial statements. They meet with and talk to essential players who affect the business or guide the Buyer’s decision-making processes. These include landlords, lenders, attorneys, accountants, and others.
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 want to do? That decision comes from the heart.
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The transition is the key factor in the future success of the business
The key factor to the business’s continuing and future success is the transition.
The new owner needs to understand how and why the previous owner operated the business in the way they did. They must also grasp the reasons behind their decisions. That’s not to say the new owner needs to make the same decisions. Still, if they can understand the reason behind previous choices, they can make any necessary changes carefully and thoughtfully. This will increase their chances of success.
Additionally, an important aspect that’s often overlooked is whether the previous owner and the new owner can collaborate in their decision-making process. This collaboration ensures 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 numerous items to address to close the sale of the business. Often, no clear role for the Seller is planned or established.
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 decision-making and then micro-manage to ensure the result meets their needs?
The more the business relies on the Seller centralizing any decision-making, the longer the Buyer will need them to stay on. Moreover, if the Seller micro-manages to ensure the result meets their needs, it increases reliance.
Critical piece of a successful transition
A critical piece in the transition is the Seller’s customer relationships. If the Seller has numerous client contacts, the success of the transition will be positively affected. This occurs when the Seller eases out of the relationship and transfers it to a new person. This person could be 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 nature? About gross sales, what is the value each contact brings, and over what period? Is there an opportunity to re-contact old clients to restore lost business patronage?
The worst thing to do is simply call each customer or send them a letter to announce a change of ownership. This only applies unless the Seller has run down the business, and there is a need to rebuild goodwill from scratch.
In line with the last suggestion, placing a sign or banner at the front of the business to announce a change of ownership is equally foolish. The Buyer has just paid a percentage of the purchase price for the goodwill of the company.
A sign or banner announcing a change of ownership serves as a notification to the world that the Seller has now “left the building,” allowing old clients to come in and meet the new owner or look for an alternative provider of the same product or service.
Buyer management style
An equally important part of the above is a critical question: 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 co-founded Apple with Steve Wozniak and was fired, only to be asked years later to return and lead 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. They share their management knowledge of how the business operates.
Phase two. The Seller continues to work in the business, but now lets the person they trained make their own decisions.
Phase three. The Seller moves to a part-time role.
Phase four. The Seller no longer works in the business but is available for phone calls or one-off in-person visits. These are to discuss specific issues and/or review the company’s operations.
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Communication and Trust
Ultimately, a successful transition is about maintaining open communication and fostering trust. Open communication allows issues to be addressed and resolved to the benefit of all parties. However, it’s only through trust that all parties are willing to do what they said or agreed they would do. Thus, the outcome decided upon during open communication is fulfilled.
A good legal contract clearly states the intentions of all parties; however, the successful transition of the business ultimately depends on the Buyer and Seller working together in good faith, rather than solely on what is written in the contract.
Are you thinking about selling your businessv in California? Would you like to know the value of your business? For more information, Business Valuation.
Andrew Rogerson is a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700. If you prefer, email him at support@rogersonbusinessservices.com. Andrew services the whole state of California.