By Randy Rua
Professionals in the mergers and acquisitions (M&A) field deal with a lot of lost business owners who do not know what they want from a transition and just impulsively enter into a transaction. Most of those transactions fail, and even the ones that do succeed, often lead to regrets. That is why I strongly recommend advance planning.
The Exit Planning process is very useful in helping to define your owner expectations. Exit Planning asks and answers all the business, personal, financial, legal and tax questions involved in selling a business. It is the umbrella strategy over Succession Planning, Value Enhancement, Estate Planning, and Tax Planning, among others. Business owners need the following four beliefs to successfully transition out of their business:
1. You will not live forever, and you must transition before the business fails or you become disabled or die.
2. It takes more effort to get out of business than it took to get into business.
3. At some point, it is better to turn your business into a less-risky, long-term investment than to continue to risk the financial future of your family.
4. Through the transition of your business, you have the power to either positively impact people and leave a legacy or negatively impact many people and create hardship for others.
BELIEFS NEEDED TO BE READY TO TRANSITION
#1 You will not live forever
Rua Associates gives educational talks on transitioning out of a business, and at those talks, we ask business owners to tell us which one of the most common causes of business transition they expect to happen to them:
- Business fails and must be liquidated
- They become disabled, forcing liquidation of the business
- A dispute between shareholders/partners or divorce/death of spouse forces liquidation
- Their death causes business to be liquidated or quickly sold
- They successfully transition out of their business and go into retirement
The first major belief you must have is that you will not live forever and you must transition before options 1-3 happen to you.
#2 Exiting your business is harder than starting it
The second major belief that you must have is that it takes as much, if not more, effort to get out of business than it took to get into business.
The transaction success rate is directly proportional to the amount of preparation that is put into the transaction process.
#3 Turning your business into a less-risky, long-term investment
As you enter into your later years in life, you need to have less-risky investments that you can count on when your potential to earn more income is diminished. Also, less-risky investments provide peace of mind, so you can do other things without worrying about managing your investment. The third belief is that as you near retirement age, it is better to turn your business investment into a less-risky, long-term investment. Not doing so is risking your family’s money.
#4 Leaving a positive legacy
This brings us to the fourth belief that owners must have, which is that they have the power through the transition of their business to either positively or negatively impact many people. A business affects the lives of the owner and the owner’s family, the employees and their families, vendors, customers, and the community where the business is located. We know small businesses are the backbone of our economy. We know when successful businesses are created, it provides opportunity for more people, and when they fail, it creates hardship for many. The impact a business transition can have on so many people is called the “ripple effect.”
Exit Planning is the creation of a comprehensive roadmap to allow a business owner to successfully transition a privately held business. An Exit Plan asks and answers all of the business, personal, financial, legal and tax questions involved in the transition of a privately owned business.
Some of the benefits of Exit Planning include:
- You are in control of when and how you exit
- You are ready when an opportunity presents itself
- You maximize what you put in your pocket
- You save on unnecessary expenses and taxes
- You beat the 95-percent failure rate
- You can tell your family and employees you have a plan
- You will not be as stressed during the selling process
Succession Planning is a process for identifying and developing internal people with the potential to fill key business leadership positions in the company. Succession Planning is focused on the business first, then the owner second. A good succession plan will:
- Involve all of the major stakeholders
- Retain the talent necessary for the business to succeed
Succession Planning will make sure the company has the human resources needed for the business to achieve the desired results. This is accomplished by developing a qualified pool of candidates ready to fill key positions and targeting necessary employee training and development. Succession Planning provides stability in leadership to sustain uninterrupted delivery of services during an owner’s departure. In some businesses, this can be a major value driver that improves the valuation of the business. This also opens up a lot of exit options or the ability to leave the business and continue owning it.
Most businesses are started and developed with the expectations of the owner in their head. This tends to work because at this stage, the owner is again leading by showing others the way. In order to equip others to assist movement toward your vision, you will need to actually document your expectations. The reason this is the first tool is because nothing happens until others see what needs to happen. This will help you create a clear picture of what a transition will look like and how you are going to get there. Even more important, this will ensure that others can achieve your expectations by getting them down on paper in a simple format that is less than two pages. The tool we use at Rua Associates for this is called the Expectations Organizer.
Randy Rua founded Rua Associates in 2010, has more than 10 years experience in the Mergers & Acquisitions field, and is a previous business owner. He has been involved in more than 54 transactions, mostly in western Michigan. Randy is a Certified Business Appraiser and a Certified Exit Planner. You can reach Randy at firstname.lastname@example.org and (616) 741-9344. This article is an excerpt from Randy’s upcoming book, which is under the working title: Transition: How to Leave a Legacy by Successfully Transferring Your Business Ownership.