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By Odee Ingersol, Nebraska Business Development Center. This is part 2 of a 3-part series on business transition. Click here for part 1: Transitioning a business to a family member.
Whether it's a strategic pivot or a retirement plan, the decision to sell a business takes careful consideration. Although many small business owners rely on a family succession-style exit plan, that isn’t always the ideal path. Sometimes it’s best to trust the legacy to someone outside of the family circle. In this article, the second of a three-part series on business transition, we walk through the crucial stages of succession planning when it comes to selling your business to a non-family member.
Planning for succession
Time is your friend when you’re thinking about an exit strategy for your small business. Ideally, you will want to begin planning your transition three to five years before you expect to leave. This gives you time to clean up your books, reduce excess risk, and demonstrate improvement to the business before you move on. Perhaps your business needs some updating or refreshing to help attract a buyer. The less time you spend planning, the less you may be able to get out of your business. You need to spend just as much time thinking about how to get out as you did to get into it. Give yourself time to set up a successful, smooth transition.
Understanding your business value
Multiple methods are available to help determine the market value of your business, but their results may vary. Your business value goes beyond the balance of your assets, debts, and revenue. Location, growth potential, and industry trends are also important factors. The waters can get a little murky, and it’s not uncommon for business owners to overestimate the value of their operations. This is why it’s important to have a valuation performed by a certified business valuator. Working with a certified valuator removes the emotional bias from the equation, giving you and potential buyers a straightforward number with which to work. Consult the Nebraska Business Development Center on where you can find a certified business evaluator in your area.
Identifying and developing potential successors
If transitioning your business to a family member isn’t an option, you’ll need to begin the process of identifying potential successors. Be prepared to be patient; it can take a while to find the right person. The average broker time for a successful sale on a broker site is 7 to 11 months. Of course, location can play into this. If you’re in a larger area, you’ll have more potential buyers than in a less populated area.
Once you’ve found a buyer, you’ll want to take time to familiarize them with your business and train them before they fully take the reins. Gradually removing yourself from the business and allowing them to step in can reduce friction between the new owner and employees and give your patrons a sense of assurance as you step away.
Legal considerations and financial planning
Just like it takes a team to run a successful business, it will take a team to help you get out of it. You’ll want to have a business broker or investment banker, attorney, accountant, appraiser or business valuator, insurance broker, and financial planner. This team of professionals will guide you through the sale of your business and help make the transition as smooth as possible.
Communication
Small businesses are built on relationships, and those relationships will help your operation continue to be successful after your departure. It’s important to be transparent with your employees, stakeholders, and clients as your business transitions. Sharing your transition plan with employees allows them to take some ownership in the future success of the business and voice their thoughts, ideas, and concerns.
Your employees will be a critical component for keeping the business moving as you transition out and your successor steps in. You’ll want to make sure they’re on board as you put your exit plan into motion so they can keep the ball rolling in the right direction.
Post-sale involvement
It’s easy to think about the logistical elements of your departure, but many small business owners put off considering the emotional aspects of stepping away. Small business ownership becomes an integral part of many people’s identity, and it can be a struggle to let it go. Maintaining a small role in an advisory capacity post-sale can help ease this transition for you and smooth the path for your successor. Of course, every succession plan is different, and for some, a clean break is the best option.
There are many factors to consider as you plan to leave your business. The Center for Rural Affairs is here to help small business owners in all aspects of their business, including succession planning. Additional resources are available through the Nebraska Business Development Center.
