How to properly prepare your business to pass it on in 2019?
At the start of a new year, it’s common for business owners to review the previous year’s balance sheets and assess the future of the company they’ve built over the years.
Might you consider transitioning your business ?
Business transition specialists often emphasize the necessity of preparing your business for transition.
While they advocate for the benefits of preparation, few provide specific guidance on how to prepare a business and outline the essential steps for effective preparation.
Why is preparation crucial for your transition, and what potential consequences could result from failing to prepare if you’re contemplating a business transition ?
The answer lies in the objectives the business owner has set:
. Identifying the best buyer for your business
. Selling your business for the highest price
. Exiting your business seamlessly and ensuring a smooth transition
. Safeguarding your company’s longevity.
Indeed, to achieve these objectives, thorough preparation is the only way forward.
Without proper preparation, it may be difficult to magnetically draw ideal buyers, receive fair financial offers due to lack of technical justification for the asking price, exit the business smoothly as the buyer might need extensive assistance, and generally ensure a smooth transition.
Hence, it’s crucial to prepare for your business transition as early as possible.
Many experts suggest that preparations should begin 5 to 10 years before transitioning an SME, which is not wrong in absolute terms.
However, realistically, I would advise you to prepare at least 1 to 2 years in advance to allocate sufficient time to prepare the company, the manager, and the transition process itself.
To underscore the vital need for preparation, let’s examine what could happen if the seller neglects to prepare for the transition.
Often, after years at the helm of their company, sellers struggle to objectively assess their company’s situation. They may become myopic and lose sight of the weaknesses and threats facing their company. Simultaneously, they may overlook the added value, strengths, and growth opportunities their company presents.
To avoid unpleasant surprises for the company or its outgoing manager post-transition, the implications and risks associated with the transition should be understood early:
. For the manager: What plans do they have after the transition? What are the financial, asset-related, and tax consequences of the transition? How will their life change?
. For the company: Can another individual seamlessly assume the manager’s role without disrupting the company’s organization? Is there a delegation system in place that will facilitate the takeover? Is there a computerized system for monitoring sales, production, human resources, and financial management?
. For the transition process itself: Does the seller have essential tools to negotiate effectively with buyers, such as a financial evaluation, a SWOT analysis highlighting the company’s performance indicators, and a presentation file? Without these elements, the seller risks appearing amateurish to prospective buyers.
In summary, there are three key aspects to prepare:
. The outgoing shareholder(s)
. The company
. The actual transition process
Preparation Step One: The Outgoing Leader(s)
For most business owners, transitioning a business is a unique event and likely one of the most significant events of their professional lives.
Therefore, it’s crucial to take a step back and objectively analyze your decision and its consequences.
Exiting the company will have significant implications for the business owner’s life. It’s important to pause and consider these consequences:
. Financial implications (potential profit and associated taxes, loss of income),
. Lifestyle changes (new professional project or cessation of professional activity),
. Family considerations (potential relocation, involvement of children in the company).
Preparation Step Two: The Company
Certain factors can diminish the value of your business during a transition or even prevent the transition altogether.
For instance: Are there non-transferable contracts? Has the shareholder community agreed to the project? Is the customer base highly concentrated?
If the answer to any of these questions is “yes”, there may be issues that need to be addressed prior to transition…
While these can likely be rectified, it takes time.
Hence, it’s crucial to identify issues that a potential buyer could easily spot, rectify them before the transition, or inform potential buyers about them and the planned solutions.
A useful strategy is to adopt a buyer’s perspective who will conduct an audit: You should scrutinize your management practices, clear any skeletons from the closet, and tidy up your company, both literally in terms of its offices or facilities, and figuratively in terms of its organization, management, and structure.
Preparation Step Three: The Transition Operation Itself
A seller should not rush into seeking a buyer without having the necessary tools in place.
At least three tools must be at your disposal before initiating the transition, irrespective of the size of the company:
Firstly, an expert in business transition should conduct a comprehensive analysis of your company to highlight its performance indicators over at least three years.
The goal is to identify the strengths and weaknesses of the company, along with the threats and opportunities.
This step is vital as, without an understanding of his company’s assets and added value, the seller will struggle to justify a valuation higher than the financial value of his company.
A company’s value cannot be solely determined based on financial data. A company’s reputation in its market, customer base, sector expertise, and location all contribute to its value. These aspects must be highlighted and can often justify a surplus value.
Once the company’s diagnosis is complete, a thorough financial analysis should be conducted by a business transition expert to determine its market value at a given point in time.
This step complements the diagnosis: the financial analysis provides a snapshot of the company’s value, for example, on December 31, whereas the diagnosis focuses on long-term performance, usually over 3 to 5 years. Armed with this document, the seller can technically defend the company’s value during negotiations, and without this, he will struggle to counter a buyer who has conducted an in-depth financial evaluation of his company.
Finally, the seller must have a comprehensive presentation file to share with potential buyers.
Today, all buyers, whether they’re a manager, a company pursuing external growth, or an investment fund, request a presentation file.
This file provides a detailed overview of the company, including its history, geographical and economic environment, market positioning, product or service presentation, and growth opportunities.
The file ensures total control over the information shared and thus total control over the confidentiality of the information. It can be shared in stages, depending on the buyer’s interest level.
Another advantage is the time saved: a well-prepared file should answer 99% of a buyer’s questions about your company.
If a buyer expresses interest and wishes to meet the seller after reviewing the presentation file, the seller begins the interaction on a positive note, reducing the need for multiple informational meetings where they repeatedly answer the same questions about the company’s history, market, competitors, etc. It’s better to save energy for the negotiation phase and to expedite the process of connecting with potential buyers.
Lastly, remember that a buyer isn’t purchasing the company’s present or past, they’re investing in its future. Therefore, it’s vital to convincingly present the company’s growth potential in your presentation file.
Conclusion
Preparing for a business transfer is not a task to be taken lightly. It involves careful consideration of personal implications, meticulous preparation of the company for a smooth transition, and strategic planning of the transfer process itself. With diligent preparation, not only can you maximize the potential value of your company but also significantly improve the likelihood of a successful transition.
Remember, the key is to start early. While experts recommend starting the process 5 to 10 years in advance, a realistic timeline is at least 1 to 2 years. This gives you ample time to understand your company’s value, address potential issues, and put systems in place that make your company an attractive prospect to potential buyers.
By preparing thoroughly, you can ensure that you achieve your goals of finding the right buyer, selling at an optimal price, facilitating a smooth transition, and securing your company’s future.
