According to Project Equity, nearly 85% of small business owners do not have a plan to transition their business. This guide will help explain why business transition planning is critical for owners, employees and others involved in your business, what information is required to develop a business transition plan, when is the right time to put a transition plan in place and steps to take when it is time to transition your business.
What is Business Transition Planning?
While 85% of small business owners do not have a business transition plan, 100% will need one. Why are so few owners prepared to exit their businesses then? Lack of time, the cost of hiring a financial advisor or simply not knowing where to start are common answers. However, even a simple plan is better than no plan at all.
Baby boomers (those over 65) own nearly 2.5 million small businesses
that employ over 25 million people.
Transition planning does not have to be an elaborate or time-consuming process. Put simply, business transition planning is a process that establishes a value for the business or the business assets, outlines the steps required to exit the business, organizes the necessary information and finally, identifies the right resources to help execute on your plan.
Bottom line, you owe it to yourself and others to have a business transition plan. Even if you are not planning to make a transition soon, having a business transition plan in place is still recommended.
Common Transition Plan Options
While most business owners would like to sell their business, less than 20% of small businesses that come onto the market actually sell. Do not let this discourage you—there are plenty of options available for small business owners.
Selling your small business to new ownership can take different forms including:
- Management Team Buyout
- Employee Stock Ownership Plans
- Private Equity Firm Purchase
- Asset Purchase Agreement.
Family businesses will need to develop a succession plan, and ensuring such a plan is clear and current can alleviate a number of challenges of passing a business to heirs or relatives.
Why Business Transition Plans Are Crucial
“If you don’t know where you are going, you’ll end up someplace else.”
– Yogi Berra
Let’s face it, at some point, every owner will need to transition out of their business. It is a matter of time. Some transitions are planned, and others are due to unexpected circumstances. A successful business transition starts with a plan that takes into account the future of the business, current employees and customers, personal and business tax implications, retirement and potential cash flow for an owner after exiting.
Going through a transition, whether planned or unexpected, without a guide only adds to an already emotional and stressful process. By having a plan in place, owners can turn to executing on a plan instead of scrambling to organize financial records, listing assets, obtaining necessary filing documents and the list goes on.
When Should I Start Considering a Business Transition?
Whether you are actively planning to exit your business or plan to stay in your business for the foreseeable future, the first step is to understand the process and potential options for your particular situation. The economic impact of the COVID pandemic taught us all that circumstances change, including ones beyond our control. So don’t wait to think about this.
Preparing a business transition plan does not require you to exit your business. Much like a business plan, a transition plan may change and evolve based on market conditions, personal circumstances and other factors change over time. At a minimum, ExitGuide highly recommends creating a continuity plan that lists key contacts and other critical information for others to access in the event unforeseen circumstances leave an owner unable to run the business.
Much like a retirement plan, thinking about when and how you will exit the business is essential.
- How long do you want to run your business?
- Are your business financials up to date?
- What is the current value of the business today?
- Do you anticipate that value increasing and, if so, by how much over what time period?
- Who are likely acquirers?
- Is this a family business and have you discussed a succession plan with those you believe will take over?
- Is there an employee (or employees) that may want to buy the business?
- Are you willing to help train a new owner?
As stated above, 100% of small business owners will transition out of their business at some point. This is an incredibly important decision with business, tax, and personal implications and one that affects others including employees, customers, vendors, and your local community. Putting a plan in place early will help you make the right decisions when the time comes.
How to Make a Transition Plan for Your Small Business
Most business owners know how to start and run a business, but when it comes to developing a transition plan, the most common question is where to start? If this describes you, you are not alone. A financial advisor may be able to help with developing a transition plan for the sale for a business as a part of a retirement strategy. ExitGuide is another option that walks owners through the process and does not focus on any one particular outcome.
Information You'll Need
ExitGuide breaks the process into three steps:
- Learn: Not every small business will find a potential buyer interested in buying the business. Understanding the array of options will allow you to make an informed decision. This can range from selling to a new owner, an employee stock ownership plan, management buyout, asset purchase agreement or other avenues. Which one is right for your situation? ExitGuide provides Guides that cover a number of these topics as well as a free assessment tool to help you start the process.
- Plan: Developing a business transition plan creates a road map for exiting your business through a sale, employee stock ownership plan, asset purchase agreement, succession plan or dissolving the business. Whether the new owners are members of the family, current employees or a yet to be identified third party, you will need to provide financial reports, legal documents and other relevant information to properly obtain a valuation on the business as well as an understanding regarding how the business operates. A business transition plan, or exit plan, requires you to organize this information so you are prepared for the transition process before it starts.
- Exit: When the time comes to transition out of the business, your plan will have you prepared with the necessary financial reports and documents to engage a potential buyer, employees or members of the family seeking to take on the ownership role. The due diligence process is when a potential buyer reviews the information you have prepared and is likely to ask questions to develop a deeper understanding of the business. Depending on the situation, you may engage a business broker, a CPA and a lawyer to assist with the process. If you are dissolving the business, experts with experience in filing the right documentation with local, state and federal agencies can be a great help and ensure things are done correctly and efficiently.
Remember, selling your business may be your ideal outcome, but it is not the only option available to you. Industry or local market conditions, broader economic conditions, personal health or finances and other factors all come into play when determining the value of a small business. It can take time to properly train a family member or current employee to take over the business. Assets that have value today will depreciate over time. All of these are need to be part of the thought process that eventually leads to a successful transition plan. Learn your options, create a plan and you will be prepared to exit your business successfully.
DON’T WAIT, PLAN YOUR EXIT WITH EXITGUIDE
Transitioning out of your own business can be confusing and emotional. You have invested a lot into your business and taking steps to exit is not easy, in fact, most owners have never been through the process. You do not have to “figure it out” on your own. ExitGuide helps owners from start to finish by answering basic questions about the process, helping you develop a plan specific to your circumstances and then connecting you with expert resources to guide you to a successful outcome.