October 18, 2011

Own a Business? Retiring soon? Here’s something to think about…

So you’ve worked for several years, building a business that has sustained you and your family, allowed you to provide a few dozen jobs (or more) over the years for your grateful employees, and generally allowed you to be a good corporate citizen. You certainly don’t want to do this forever, however; life begins at […]

So you’ve worked for several years, building a business that has sustained you and your family, allowed you to provide a few dozen jobs (or more) over the years for your grateful employees, and generally allowed you to be a good corporate citizen.

You certainly don’t want to do this forever, however; life begins at retirement, after all, and you want to make sure that you’re able to truly enjoy the fruits of your labour. So, the sale of your business is in order. For purposes of this article, we assume that you are approximately 5 years away from actually leaving your work career behind.

What issues need to be addressed in order to prepare for the day when your business is firmly placed in your rear-view mirror? Here are a few thoughts:

1. Get your business valued . TODAY. You do not want to find out, when you are a few months away from retirement, that your business is nowhere near the value that you thought it might have. It is the tendency of most business owners to think that their businesses are more valuable than they actually are- call it the “no ugly babies” syndrome.

You will need to be able to take corrective action to improve the value of your business if you know what your baseline is. It is also a good idea to have this done annually as you approach the day where you will no longer be involved in the business- you need to know how the business value is trending from one year to the next. You ostensibly would like for this number to be increasing over time, and it is a good idea to verify that independently.

2. Thoroughly document all of your processes. From the mundane to the highly complex, everything needs to be written down. Remember- you’ve been in your business for several years or more, and so you know all of your duties like the back of your hand. But a potential new owner will not have that same knowledge bank, and will need to be able to ramp up in pretty short order to not experience any drop-off in his/her new business after ownership changes hands. And you should know that this is one of the most important issues that impacts the value of a business that will be changing ownership.
3. Thoroughly document all of the processes of your subordinates. Again- from the mundane to the complex, it all needs to be documented. If you’re a good business owner, you have loyal employees who have been with you for several years. They operate independently, and are easy to supervise for that reason. But if they were to not be available, for whatever reason, and they needed to be replaced, it would certainly to be your advantage for a new crew to be able to pick up where the old one left off.

Ask yourself this question- what if your employees all left TODAY? Maybe they all pitched in and bought a winning Powerball ticket, and now they each have $3 million coming to them? If your business would be adversely impacted, maybe you need to look at providing more documentation on all of the duties of your employees.

4. Identify a right-hand person to be in charge of operations. You may already have this person- a GM/operations manager type. If so, great- begin the process of handing over day-to-day operations to him/her. You do not need to divulge the reason for this- it is a natural developmental process for a member of management in any case- but the presence of a key person who can be in charge of the operational aspects of the business is a key component of preserving the value of a business.
5. Maintain a clean set of financials. Yet another reason why this is always a good business idea-  a potential purchaser for your business will eventually need to scrutinize them. And clean financials are no doubt an asset (no pun intended) when an external entity, such as a business valuation specialist, needs to use them.

On a related note- your financials need to include 5-year projections/pro forma financial statements. This is key to understanding what the business outlook is, and in fact is an important component of one of the most important business valuation methods- the Discounted Cash Flow analysis.

Finally,

6. Create a timetable for your departure. It will of course be highly specific to your business, and you might be the one best suited to putting it together. Some occurrences for which you might want to plan:

It typically takes a minimum of 6 months for a broker to get your business sold- in all likelihood, you’re going to need more time than this.

Think of all of the administrative items that you need to get done- your name off of the leases, debt obligations, Secretary of State filings, etc- a lot to do there. A good business broker will be able to assist you with this.

Ensure that your employees and management staff are all going to be able to keep the business thriving through the transitional period- you will especially want to ensure that they are all trained appropriately.

These are a few considerations that you might want to entertain as part of the overall process of planning for the change of ownership of your business; if you would like to talk about how this impacts you specifically, please feel free to contact me for a confidential, no-obligation conversation.

A few thoughts: