Remember the mixed emotions you experienced when your school or college ended? Feeling happy and unhappy at the same time. Some things will never be missed, while other memories will be forever treasured. Change is an inevitable part of life and still the only thing that is constant. A business transition is a change in the ownership of an organisation. The transition can be anything from expanding a business, exiting it or simply taking a step back.
Preparing for a business transition is like building a house from scratch. It requires a lot of preparation. It is a step-by-step procedure where each piece needs to be in place for achieving maximum performance. The first step is deciding when the transition should be made.
Is transition management different from change management?
There is an intrinsic link between transition and change management. Transition management is a part of the change management process. Change management deals with preparing the organization and its employees for the new ownership. Whereas, a transition management plan is tailored to an individual level. The psychological impact of adjusting to the organisational change will directly impact how long the change will last. A new owner may have a new way of getting things done, which the old staff may not be comfortable with. Transition management is all about reorienting people’s needs in response to the change that occurred. For a smooth and successful change of ownership, transition and change management goals should be aligned.
Often when you think you’re at the end of something, you’re at the beginning of something else.
- Fred Rogers
What compels a person to transition?
Often the term ‘exit strategy’ is used in selling a business or ‘cashing out’. An entrepreneur who plans and thinks ahead often has an exit strategy in his head. The few reasons why an entrepreneur may prefer to exit are:
Seizing the perfect opportunity
Many entrepreneurs prefer selling their business when a buyer makes an offer they cannot refuse. If the condition is working to an entrepreneur’s advantage, he will make a quick move of selling his business. In this case, it is essential to know in advance what your business is worth in the market. Also, the demand of potential buyers for your business. These two things will give you an idea of what you and your business deserve.
Being ready for retirement
We often hear many young adults who establish their business, make it successful, and then retire in their late 20s or early 30s. Most people do have things planned ahead of time when it comes to retirement. After you have sold your business, you should have enough money to sustain yourself for the rest of your life. Create an estimate of all possible future expenses and then tally with the reality of your company’s worth. This will reflect how ready you are for retirement.
Moving on to the next best thing
Many entrepreneurs also prefer to sell their business when they feel that they have done their part. They usually prefer to move-on to their next venture. This comes from a place of feeling saturated, bored or burned out. Selling your business is not the only way to move on. You can start a franchise if you feel your business is successful enough, you can consider merging with other companies, or even going public. These are a few alternatives worth considering if you still want to do this business on the side. However, in case you are completely done with your business, it makes sense to simply sell and move on.
Business troubles and drawbacks
A business requires capital to function. If a business is facing financial difficulties with no glimpse of hope in the future to revive it, then selling it and exiting might be the only option. Usually, when a business is sold due to financial trouble it is sold lower than its value. Simply stating why would a buyer pay heaps of profit for selling a loss incurring business? It is usually an exit strategy preferred before things get worse.
Businesses shutting down due to disputes amongst partners is not a surprising revelation. Many entrepreneurs decide to sell their business and part ways for good after constant tiffs with partners. Hiring negotiators is the last ray of hope before exiting in such circumstances
Unexpected life changes
Life does not always go as planned. Sudden changes in an entrepreneur’s life may compel the business to transition. Usually, the common life changes that lead to a business transitioning are death, divorce, and disability.
In case of a sole proprietor’s death where there is no one to take over, the transition seems the only available option. A disability where an owner ceases to function and carry out everyday business activities, the transition of a business again seems inevitable. Entrepreneurs are always advised to have long-term disability insurance especially sole proprietors.
A divorce may also lead to a change of ownership in a business and cause its transition. In most cases, parting ways from your spouse may lead to the division of all assets including your business. Many owners opt for selling their business while dividing the assets. However, if the divorce is on a mutually-good term, you may even opt for partnership.
Steps for transitioning your business efficiently
Strategic planning is a must-have if you want to transition your business smoothly and efficiently. Before the transition takes place, an entrepreneur must ensure that things are in place to support the new owners. Below are the steps worth considering for transitioning your business:
Evaluating the market
Knowing the current state of the market is vital before selling your business. Take a close look at how your business is doing and how the industry is currently functioning. This will help you understand what you can quote to your initial potential buyers.
Assembling your advisory team
The transition of a business requires lots of planning and anticipation. A team of professional advisors will help you to get all the paperwork beforehand and have everything in place. The usual advisors you will need include the insurance agent, wealth manager, estate planning attorney, and tax professionals.
Reviewing and organising important documents
Before you consider talking with potential buyers, it is essential to note that your financial records and corporate documents are all in place. The documents from when you incorporated the company to the last financial year’s balance sheet, all of it should be up-to-date. Also, have a look at the existing business contacts that exist before the transition.
The question isn’t at what age I want to retire, it’s at what income.
- George Foreman
Knowing the worth of your company
You’ll know what your company’s worth after getting everything reviewed by your team of advisory and getting all the paperwork done. Oversee all the potential issues that might affect your sale adversely or delay it. Also, it is a good time to evaluate the overall corporate structure of your organisation. Knowing what about the business is going to work in favour or against while selling will help you estimate its worth.
Obtaining a valuation
After you know your company’s worth, get in talks with the broker to get the final figures. Figure out the range of possible quotes you are interested in selling your company for. A credentialed and experienced business appraiser will help you in calculating your business valuation.
Engaging with potential buyers
After the valuation, your business is ready for the transition. This is one of the most crucial steps in the transition. Start engaging with various buyers, see the quotes they are offering. Apart from the money aspect, you also want to ensure that the new owner is good for your employees, the reputation of your business and can meet the existing needs of your customers.
Structuring your transition
Once you have decided whom you are selling your business to, decide how to structure the transition of your business. This will require you to discuss with the buyer all the changes he plans on doing while taking over the business. Having a well-structured transition will ensure that your employees, investors and customers are minimally impacted by this change of ownership.
What are the challenges faced while transitioning a business?
Businesses are sold to either seek extreme rewards or as a compromise to come out of an existing crisis. Choosing the next owner is a huge responsibility for the current entrepreneur. There are several things he or she has to address before choosing a buyer, after choosing a buyer and even while choosing a buyer. Clearly a tedious and time-consuming process.
Financing the sale of your company
The next buyer may not have adequate funds to outright purchase the entire company. There are several funding options that are needed to be explored to get your entire share overtime. Some entrepreneurs consider seller financing or third-party financing to fund the sale of their company. You can also consider internal funding options to buy out your share eventually.
Selecting the right successor
The future of your company depends on the next owner. Choosing the right successor is one of the biggest hurdles an entrepreneur comes across. There are several factors you need to consider while considering a potential buyer. Know his or her capabilities, goodwill, ability and attitude towards taking ownership. Also, ensure that they have given enough time towards getting to know and becoming well acquainted with the company’s current structure and processes. Careful assessment while choosing a buyer is the only way to make the transition successful.
Letting go of your business
Any entrepreneur will find it hard to relinquish control over their business that they have worked relentlessly building from scratch. Minimising your role and eventually leaving your company is tougher than it sounds. There will always be that temptation to take things in hand. Letting go of managing your former employees or making deals with usual buyers will be hard. Start one step at a time here with the new successor. While training him for the company, start taking steps back eventually and put him on the pedestal.
Each and every business has its own unique manner of transitioning. For an entrepreneur, the transition of the s business can be a roller coaster ride. It is important for you to remember that you gave your best while planning the transition and choosing the right successor. For a successful transition, have a well-established relationship with your successor. It will come in handy more often than you think. Business goals keep changing and evolving over the years with more successors coming in and going out. To know more about how evolving business goals, impact an organisation, read our article on ‘business goals’.