Making the Change: A Guide to Transitioning Ownership of Your Business
Creating a proactive plan for business ownership transition can help facilitate a smooth changeover.
Transitioning ownership of a business is an important step in the life of any business owner. It involves transferring the ownership and management of a business from one person or group to another, and can occur for a variety of reasons, including retirement, a desire to focus on other ventures or simply passing the business down to the next generation. No matter the reason, a successful ownership transition requires careful planning and execution to ensure a maximum value, a smooth handoff and continued success of the business. Companies are commonly valued based on their ability to generate future cash flow, but a crucial component to the value is the new owner’s ability to achieve the projected financial performance of the business so it is an important decision. Here are four key considerations to effectively transition ownership.
- Define Goals
Business owners want to ensure the company is transitioning to the right ownership and that goals align. It is important to define goals such as the desired financial outcome, operational structure and any other related objectives. One of the biggest questions to answer is whether it will be an internal or external ownership transition. Most companies look first at an internal plan as it provides for a continuation of the business, access to a pool of buyers who are in the company and ongoing control until retirement. While an external sale might provide for a higher price and greater liquidity, business owners will most often look at an external sale only after an internal transition fails or when they are approached by a potential buyer.
- Explore Leadership & Management Roles
A transition plan should outline how to assess a candidate’s characteristics in two main areas:
- Interpersonal skills
- Professional experience
Whether someone is a family member or not, assuming a leadership role will require the same traits, such as humility, accountability, maturity, integrity and diligence. The candidates for management or executive positions should possess these characteristics, even if they do not have an ownership role or voting control. A wide range of leadership positions may need to be filled, so the transition plan cannot focus on a single heir. For example, a management role in the family office will require a different skill set than someone on the management team of the family business. Thorough planning will account for each leadership opportunity and outline the specific preparations necessary.
Each role that transitions should have a detailed job description that defines the core functions and responsibilities. This description should also draw on input from people in that role, which can help to identify the required traits and characterize the ideal candidate. A frank evaluation of all candidates’ capabilities will help to assess and address any gaps. Ongoing evaluations of the candidate can help keep the transition on track, and these evaluations can also be tied to compensation and reported to the board for approval.
For leadership in business, the successor needs to have a comprehensive understanding of the business’s products and/or services and be able to persuasively advocate for the company. They should also have deep-rooted industry knowledge and experience, which will help them tap the best people to fill roles throughout the business. They will need to combine this knowledge and experience with strong business acumen and the ability to manage people, so they can form and articulate a vision for the future that gains firm-wide buy-in.
The leader should bear in mind the three C’s that form the pillars of effective governance: consensus, communication and consistency. Strong governance practices help facilitate information sharing as appropriate to achieve alignment and maintain unity.
- Obtain a Business Valuation
A valuation can help establish the buyout price. From there, business owners can begin to consider how to best plan for transition of that value. There are several different ways that owners determine the value of their business. These range from educated guesses to values based on an established formula to detailed valuation reports prepared by qualified professionals.
- Evaluate Options
When planning for an ownership transition, it’s important to take the time to evaluate options and make sure plans are in line with the goals and objectives. A proper transition plan is one that will mesh the goals of the seller and appropriate buyer. While it is critical that the plan be financially beneficial to the sellers, it is equally important that the plan be affordable to the buyer. This will often lead to a plan that involves gradual cross purchases of ownership and funding with payments over a period of years.
What are the next steps to prepare for a change in ownership?
Take the time to build an appropriate transition plan for the business. Have conversations with professionals who can help with the journey of transitioning to the next owner. They can also help with complex issues such as tax implications, retirement planning, business restructuring and how to maximize the value of your business.
Contact an Adams Brown advisor to discuss business goals and ensure the long-term success of the company.