Every Business Owner Should Have a Transition Strategy
Here’s why and how to get started.
This blog post is our 52nd - a full year of valuable information for business owners who are passionate about building long term value in their business. And, today, I want to take the time to tell you more about why we do what we do.
By now, you probably already know that I have built a career buying and selling businesses - 100 transactions to be exact. And, I’ve been successful at selling my businesses 100% of the time. Unfortunately, for most business owners, the stats are not so good.
I use the term ‘transition’ rather than ‘exit’ because most business owners don’t like to talk about their exit strategy. For some reason, they are allergic to that 4-letter word, but the fact remains that 100% of all businesses will eventually transition. Unfortunately, most business transitions fail to reach the intended finish line.
In fact, roughly 83 percent of businesses that go on the market don’t sell. That’s worth repeating—83 percent of businesses that put themselves up for sale don’t close a transaction. That statistic means that a mere 17 percent exit successfully. And, family business transitions, or intergenerational transfers, are not much different. Only 30 percent of those businesses successfully transition to the next generation.
Let’s examine why those precious few are in what I call the 17% Club succeed.
A few of them are disruptive businesses that command a high valuation by large suitors. Some are just plain lucky — in the right business at the right time. But the majority have one thing in common - they are prepared.
Being prepared means that the business owner has defined a transition strategy and has relentlessly executed that strategy until he or she has reached the goal. They focus on building long term value. They have surrounded themselves with great internal and external teams to help them achieve their goal. And that goal has been to exit the business at the highest value possible.
Building value and transitioning a business is a process, and it takes time. This process is very different from running a business on a day-to-day basis.
Having been a business owner myself (many times), I think one of the reasons many business owners don’t get started developing their transition strategy is because they don’t know where to start. For me, the first time was awkward and daunting. I didn’t know what to expect, what questions to ask, or even where to turn for help. Although I eventually found the right resources, it was an exercise in trial and error for sure and I made every mistake in the book.
Over time, I have developed tried and true methods for preparing a business for transition. I’ve used the very same methods we talk about on this podcast, in our weekly blog post and throughout the free stuff on our website - and I do all of this for free because I’m passionate about educating business owners so they don’t make the same mistakes that will land them firmly in the 83% group of businesses that fail to transition. Frankly, as I frequently say, any business owner can prepare their business for transition if they would simply consume the free content we produce, develop a transition strategy and relentlessly pursue the target.
Now don’t get me wrong, we work with business owners to do just that. They pay for our services to manage the project and hold them accountable, but if you really wanted to do this on your own, you can. You’re a business owner. You can do anything you put your mind to. If you need help, or someone to hold you accountable, that’s why we’re here.
Why We Do This
Many business owners think that selling a business is easy once they decide to do it. They come by it honestly, though. Any experienced business owner gets calls from so-called buyers all the time - which leads them to think that it will be easy to sell their business. Nothing could be further from the truth.
Every company gets these fishing calls from ‘potential buyers’. Most of these calls are from entry level folks who are dialing for dollars. I recently talked with a business broker who told me he makes 500 calls a day looking for companies to sell. As I’ve mentioned before, most of these calls are not targeting you specifically. Instead, they are just looking for a business, any business, to sell. Now that’s not to mean that there aren’t targeted calls, because I’ve been on the receiving end of many, and in fact, we provide buyer representation services to our clients doing just that.
However, when a business owner gets those calls, it creates a sense of complacency. They start to think that they can get their price because there are so many interested parties. And, if that business is ready to sell, meaning that it’s thoroughly prepared for a transition, they might be right. But, the vast majority of all business owners out there are nowhere near ready, and they’re only setting themselves up for disappointment.
Whether you get these calls or not, doesn’t it make sense to also start preparing your business for transition? If you’re like most business owners, you may not know where to start, so let me outline a plan that will at least get you moving in the right direction.
At the outset, consider connecting with a Certified Exit Planning Advisor or CEPA. CEPA is a certification offered by the Exit Planning Institute where candidates undergo rigorous training to learn how to help business owners navigate the exit planning waters. After hundreds of hours of training, CEPAs sit for a certification exam, just like other trained professionals.
Some CEPAs are attorneys or estate planners or financial professionals. Some have other professional designations, like CPA or CFP. Still others, like Mastery Partners, are value builders trained in helping businesses increase long term value.
How to Get Started
While a CEPA can help you get your business in order, if you’d like to do some of it yourself, here’s how to get started on your own.
1. Get an Estimate of Business Value
Most business owners really don’t know what their business is worth. And, for most of them, if they did, they’d be shocked and dismayed. But, by understanding what it’s worth, you’ll have a starting point and that will help drive your decision process. We offer a free valuation tool right on our website. Use it.
2. Look for Low Hanging Fruit
Figure out what the low hanging fruit is, and knock it out. Start with the easy stuff in your business. Get your corporate records in order. Make a list of critical processes in the businesses so you can start documenting them.
And, make sure that you’ve settled and documented all of your outstanding shareholder issues. If you have more than one shareholder or if you have partners, make sure that you have all of the right agreements in place. You should have a shareholder agreement, or partnership agreement, and make sure you have a buy-sell agreement to resolve contingent issues.
3. Take Time to De-Risk your Business
Have answers and contingency plans for the Five D’s: death, divorce, disability, disagreement, and distress. Think about what will happen if one of these Five Ds rears its ugly head. Have a written plan in place to handle it. What happens if you, or one of your partners, shareholders or key employees dies, becomes disabled and can’t work, or gets a divorce? What happens if you get into disagreements with your shareholders or partners? What happens if one of your shareholders or partners or key employees or worse, major customers suddenly leaves the business? These issues are not always easy things to resolve, but they are a great place to start. Think of this exercise as “de-risking” the business.
4. Plan your Third Act
Think about what happens next after the business transitions. You will need to really spend some time thinking about your own future. When do you want to exit the business? What will you do when you exit the business? Are you sure that what you’re planning will be as fulfilling as running the business?
5. Examine your Personal Finances
Take the time to get your personal financial house in order. Even though over 80 percent of your net worth is probably tied up in your business, you need to have a financial professional work up a real financial plan. Just because you think you need $3 million to retire does not mean that is the right answer.
6. And finally - consider engaging with Mastery Partners.
At Mastery Partners, our motto is “Transition on your Terms,” and it is our mission to change the outcome for our clients by helping them identify, protect, build, harvest, and manage business value. We are passionate about making sure our clients can successfully carry out their transition strategy, regardless of what it looks like.
So there you have it - tips to start moving in the right direction toward your future business transition. I hope that gives you an idea of why we do what we do!
So, stop right now, and take action on one of the items in the list above. Having a transition strategy will give you clarity and peace of mind. And if you need help, schedule a free call with me or check out the FREE resources on our website to get started.
Message me on LinkedIn or on our Facebook Page or email me or call my cell and tell me about your transition strategy. It can have more impact on your business value than you think! What are you going to do today - to Maximize Business Value?
And remember, we’re here to help. If we can help you in any way don’t hesitate to reach out!
Want to learn more? Check out our podcast:
ABOUT THE AUTHOR
Tom Bronson is the founder and President of Mastery Partners, a company that helps business owners maximize business value, design exit strategy, and transition their business on their terms. Mastery utilizes proven techniques and strategies that dramatically improve business value that was developed during Tom’s career 100 business transactions as either a business buyer or seller. As a business owner himself, he has been in your situation a hundred times, and he knows what it takes to craft the right strategy. Bronson is passionate about helping business owners and has the experience to do it. Want to chat more or think Tom can help you? Reach out at email@example.com or check out his book, Maximize Business Value, Begin with The Exit in Mind (2020).
Mastery Partners, where our mission is to equip business owners to Maximize Business Value so they can transition their business on their terms. Our mission was born from the lessons we’ve learned from over 100 business transactions, which fuels our desire to share our experiences and wisdom so you can succeed.