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The Succession Planning Reality Check

Business owners are bombarded with calls, emails, letters and brochures asking if they want to sell their business and urging them to call, contact or “please attend our seminar/webinar” on transitioning their business.

Why the constant bombardment? The answer is simple: there are roughly 4 million privately held businesses in the United States and two-thirds are owned by baby boomers. That is roughly 2.7 million opportunities for insurance agents, investment advisors, business brokers, private equity firms and others to get new clients.

So why is this relevant to you? Numerous surveys conclude that most business owners are not prepared to transition their business through gifting, internal sale, third-party sale or partial sale because they feel they have time on their side and preparing their business for any type of transition shouldn’t really take that much time. What’s the reality of the situation? The process can take anywhere from one to three years.

Positioning your business for a transfer of ownership is like selling your house. You have an idea about its value because your realtor has provided recent sales transactions in your neighborhood. However, once the sales process begins prospective buyers point out that the house needs a new roof, the windows are inefficient, the driveway needs repairing, the kitchen needs updating, etc. You get the picture. All of these factors have an impact on the house’s value.

You should look at your company in the same way and ask yourself if you have:

  • The knowledge that you can afford to sell (can you live off of the sale price?)
  • A rough valuation
  • A solid management team in place
  • At the very least, accountant reviewed financial statements
  • A client list and percentage of sales
  • A good handle on your inventory, age, current value and number of turns
  • The percentage of receivables likely to be collected
  • A listing of all hard assets owned by the company and comparable values
  • Ownership of the building outside of the company (are you going to sell or lease it? (If selling, do you have an appraised value. If leasing, do you have comparable rental rates for your area?))

This sounds like a lot of work, and it is. This is why many owners are not ready for transition. They are behind in positioning the business to maximize the business value.

The decision process is difficult, but you don’t have to make the decision right now. If you begin the planning process now, however, you are well ahead of the game.

A good way to begin is to consult with professionals and make it clear to them that you are looking to position yourself and the company for a potential transition.

One question that we frequently hear is, “When should I start the process?” The answer is now! You have compressed the timeline for a successful outcome.