This article originally appeared in the October 2015 issue of Smart Business Philadelphia.
For the owner of a private company, the transfer of your business is one of the most difficult and complex things you will ever do. In fact, for entrepreneurial people, the transition out of the business is often much harder than the grueling task of building it.
The challenges are many. The process is fraught with business and financial issues, as well as issues related to people and succession and it becomes easy to get very emotional as you start to think about life after owning your business.
“For most owners, the business is part of their life – almost like a child that they have raised and nurtured,” says Mario O. Vicari, CPA, Director at Kreischer Miller.
“Many owners have difficulty seeing themselves apart from the business. Also, many feel a sense of responsibility to their employees and the community that they operate in.”
Smart Business spoke with Vicari about how to ease the stress and make a smooth transition from owning your business.
What can be done to make the transition of ownership an easier process?
Many owners do not think ahead and identify all of the transfer strategies available to them. They just believe they will get to a certain point and expect a buyer to show up with a lot of money. In truth, selling to a third party is only one of several transfer strategies. Others include a sale/gift within the family or partner, sale to employees, an ESOP or continuing to operate the business as an investment.
In planning for an ownership transfer, it is important for owners to identify their motives – which rarely involve only money. Most often, owners have more than one transfer motive and those motives need to be explored and understood because they should dictate the transfer strategy. The lack of clarity on motives is usually the biggest mistake in transferring a private business.
Preparedness, or rather lack thereof on the part of the business and the owner, is also a critical issue to a successful business transfer strategy and should be addressed well ahead of time. A healthy, well-performing business provides maximum flexibility to the owner(s) in selecting a transfer strategy. The reality is that many private companies are lifestyle businesses and are not managed to maximize value creation for the owners. Step one of improving the performance of the company is for you to look at your company as an investment – and expect a return on your invested capital. Running the business in a way that maximizes value expands the number of transfer options.
How would you break down the levels of preparedness for owners?
Owner preparedness takes two forms: financial and emotional. One of the biggest holdbacks in the transfer of private companies is when the owner is stuck and cannot make a decision.
A common hurdle is the fear of running out of money. While this is a very real fear, it is probably one of the most manageable things in the entire transfer process. With the help of a competent financial planner, you should be able to get clear on your personal financial picture in order to answer one key question: How much is enough?
Emotional readiness is the most complex issue to manage and plan for in a transfer. The question of what to do after the business is difficult for most owners to conceive. There is no magic pill to solve this issue, but ignoring it only makes it harder. One useful tip is to seek out advice from others who have walked in your shoes and gone through this very personal process. Every owner has to exit the business at some point – why not do it in a planned way?
Private business owners are unique. One of the reasons many are in business is because they want independence to do what they want. They build their businesses on their own terms. Why not plan your business transfer the same way – on your own terms? To do that think about your motives, prepare your business and yourself emotionally and mentally , and find good advisers to help you through it.
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