Many business owners are used to having as much control over how the business functions as possible. They make themselves the go-to person for big decisions, whether they are right or wrong, and own the consequences of those decisions, whether they’re good or bad. This owner-centric attitude is often good and sometimes necessary for the business’ success. But when owners begin to consider how they will plan for their businesses’ futures, that style of ownership can do more harm than good. This article will explain three things owners must remember if they interested in planning for a third-party sale of their businesses.
1. Buyers Don’t Want an Owner Who Matters
When business owners start planning for their businesses’ futures, they often do so with similar gusto as when they started the business. They want to roll up their sleeves, get their hands dirty, and guide the process from front to back. In fact, this desire to be heavily involved is a primary reason why owners put off business-future planning: They worry they won’t have time to commit to it, even though that’s rarely the case. This desire to be heavily involved is also the last thing a buyer ever wants to see.
When planning for the business’ future, owners must make themselves inconsequential to the business’ success. If the owner is too entwined in the business’ performance, it can negatively affect the business’ transferable value, which is what the business is worth without the owner. In cases in which owners are critical to the business’ success, owners must choose whether they want to (a) make the business less reliant on them or (b) sell the business to someone else and then work for the person they sold it to until the company can function without them.
Most owners cringe at the idea of having to work for someone else, especially after building a successful business. For owners like these, there are two things advisors can suggest to help them avoid this fate.
- Find and install next-level management. Managers who can run the business in the owner’s stead are in high demand among qualified buyers. Next-level managers give owners the freedom to sell the business when they choose because nothing goes awry once the owner is away. Exit Planning Advisors have the tools and networks to help owners train internal managers to become next-level managers, or find next-level managers from outside the business and entice them to take over.
- Start delegating. Until owners begin delegating important tasks to others, the business has little value to potential buyers. Exit Planning Advisors help owners determine what’s most important to them, which serves as a road map for what owners delegate to managers for completion.
2. Key Employees Need Incentive to Stay
Key employees tangibly contribute to the success of the business in ways that go above and beyond expectations. Key employees often know their value to the company. If they feel that owners don’t recognize their contributions to the business’ success, they can negatively affect an owner’s plans for a sale to a third party. In the best-case scenario, they’ll simply leave for greener pastures, which can negatively affect business operations and value. In the worst cases, they’ll work for a competitor, take clients with them, or demand a cut of the owner’s final sale price in the 11th hour. That’s why owners need to properly incentivize key employees as they plan for a sale to a third party.
Formal incentive plans can keep key employees tied to the company as the owner completes the sale process. However, formal incentive plans must do four things to be effective:
- Be tied to performance standards.
- Be clear, consistent, specific, and in writing.
- Create substantial bonuses.
- Handcuff the employee to the business.
Exit Planning Advisors work closely with relevant members of their Advisor Teams to create incentive plans that fulfill all four of these criteria. It’s important for business owners to work with professionals when creating formal incentive plans because of how complex they can be and how important they are in completing a third-party sale.
3. Buyers Want a Documented, Proven Growth Strategy
Owners who can provide a documented, proven growth strategy to buyers make life easier for themselves in two ways. First, documented growth strategies position owners to grow their companies more effectively than owners who don’t have documented growth strategies. Growing the company is a goal all business owners have regardless of when or to whom they end up leaving their businesses.
Second, having a documented growth plan eases the transition between the owner’s exit and next-level management’s entrance as the decision-making body for the business. This makes the business more valuable to buyers because they will have to put minimal effort into absorbing the new business. It also allows owners to move toward only doing things that they want to do within the business, rather than acting as the decision maker for every little issue.
Exit Planning Advisors provide owners with processes, specialized advisors, and proven strategies to help business owners implement and document successful growth plans. When combined with a next-level management team and the proper incentive programs, advisors can help owners plan for their businesses’ futures without eating into their valuable time.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
Published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.
Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.