Reasons to Transition a Business
Do you have an exit strategy for your business?
Most small business owners have one. Those without an exit strategy frequently miss out. Whether you have one or not, the point is to plan for the future today, so that when the time comes to transition, you are prepared.
Below are several reasons to transition a business.
The ability to transition a business due to retirement is more formula driven than those documented below. One of the most important questions to consider is your ability to afford all the things you envisioned in retirement. In other words, do you have enough capital now and after the sale of your company. In order to better articulate future income needs, you will need to observe personal finances and what you would realistically expect from the sale of your company.
Identifying the Opportunity to Sell
My dad used to share with me that “everything is for sale”. I would ask, “at what price is everything for sale?” My dad would then point out that that is the question. When the market is working in your favor, the timing of a sale could be more advantageous. The likelihood of someone walking in the door and presenting an attractive price is unlikely, but it does occur. As the owner of a business, you should be aware of the market and your business’s attractiveness to potential buyers.
Boredom and Burnout
Boredom and burnout represent a few reasons to transition a business. If you are more interested in trading cryptocurrency or starting a new business, you should probably transition. The financial implications will become apparent the longer you continue to operate the business. These do not mean that you have to sell your business. Instead, consider the options below:
- Merging with another company
- Bringing in partners
- Hiring a hiring a manager to take on all or part of your current role
Forced to Sell
There are instances where a business transition is forced upon an owner or owners. For instance, you may be operating in a down market and the business is struggling or experiencing partner disputes. If you have the ability to withstand the down market, do so. Holding firm during this time might be difficult, but your business has the potential of being worth more on the other side of a down market.
I have yet to deal with a partner dispute that has resulted in the most advantageous value for a business. Reason being, both parties typically do not come to terms, resulting in a quick sell of the business or of an owner share in the business.
The three most common life changes that force transitions in business are death, disability and divorce.
Death. Death is sudden. For this purpose, each business owner should have a life insurance policy. After a life insurance policy, how can you best prepare for death? Create a business plan scenario that takes into account your death and how it would impact your business. Address who will be operating the business and how it will function without you.
Disability. Insurance seems to be a friend again. Having long-term disability insurance is essential if you are a sole proprietor of a business. Create another business plan scenario that takes into account long-term disability insurance. Identify who will be operating the business should you become disabled for an extended period of time.
Divorce. I have worked with several businesses where the owner of the business was going through a divorce. Even if the business is considered “yours”, the business is still considered an asset. If you decide not to sell your company, you will have to determine how to compensate your spouse.
By understanding the top reasons for a business transition, you as the business owner can prepare for the future of your company. Do not procrastinate, plan now. By understanding the value of your business today, you are better able to develop the various scenarios discussed above.