By Jonathan Dane, CFA, CFP®, Defiant Capital Group
Whether selling a business to a third-party, transitioning ownership to your children, or stepping back from day-to-day operations, it’s important you and your business are ready for the transition. Often times founders and shareholders wait until the last minute to prepare for the transition, which can hurt business value and your ultimate post-transaction proceeds. Here are five things to do before you start to transition your business.
- Set realistic expectations
Before starting any transition process it’s important you have realistic expectations of the outcome. That means thinking though what your business is worth, what type of role (if any) you would like post-transaction, and your ideal transition structure. It can be helpful to have exploratory discussions with advisors early to get ideas of market valuations for your business, deal structuring, and common post-transaction involvement obligations.
- Start optimizing for the transition before the transition
Many founder-owned businesses are family businesses that employ family members and make liberal expense deductions. As you plan for a transition it’s important to start optimizing your business for profitability, which typically involves separating it fully from your personal life. That means cutting back on the “personal” expenses and other expenses that lower profitability, and making strategic improvements to areas of the business that will drive higher valuations. The more you can show accelerating growth, and the less accounting adjustments needed at the time of transition, the easier the discussion on business valuation.
- Build out your advisory team early
Most founders will transition a business once in their life, which is why having an experienced team of advisors is essential for a successful transition. Prior to the transition its helpful to take the time and find a good and experienced team of accountants, lawyers and financial advisors that you are comfortable working with. In addition, it’s helpful to review business structure and ownership prior to transition, as there can be opportunities to make adjustments that will ease the transition that must be done before transition.
- Clean up your accounting
Whether transitioning ownership to your children or a third-party your financial statements will be a key component to determining your businesses value (and what you get paid). It’s important that you have your accounting organized into easily recognizable categories, that all expenses/income are properly recorded (no “other” accounts), and that you can provide at least two years of statements. It can also be helpful to have your statements reviewed by a larger accounting firm to help build third-party confidence in your accounting.
- Take care of your team
Employees are critical to the success of a business, and even more important to ensuring a smooth transition. Any potential buyer will be relying on the experience and consistency that your existing team brings with the purchase. As you start to think about your transition it’s important you bring key employees into the conversation, but at the right time. When you do bring them in being able to reassure them that they will be take care of now, and going forward, is important, as well as letting them know how this transition can benefit them. Having your staff excited about the sale can go a long way to ensuring a smooth transition.
Last words – be prepared to work
The prospects of stepping back from your business and moving on to the next stage in your life can be exciting, but remember that the actual transition is difficult and arduous, and will require significant time and attention. Between banker meetings, document requests, and due diligence requests, time will be stretched. Throughout the process you must remain engaged and committed, all the while simultaneously continuing to run the day-to-day operations of the company. Before starting ensure the company is ready and you are committed.
About Defiant Capital Group
Defiant Capital Group is an investment advisory firm that partners with individuals and highly affluent families that have achieved substantial wealth. For the families and entrepreneurs with whom we partner we provide highly bespoke advice and advisory across wealth management, investment management, and affiliated private companies.
NWIRC will host Jonathan Dane to present a free webinar, Preparing Your Business for a Future Transition, on October 19 from 9:00-10:00am. More details and register here.
