Common Mistakes Business Owners Make During Ownership Transitions
For many businesses, the transition to new ownership is inevitable. However, most business owners fail to think about it until it’s too late. Even if the transition is 10 to 15 years down the line, it requires planning and preparation for smooth execution.
Ownership transition types range from passing control to successors to selling your business to a third party. Irrespective of the ownership transition type, it can be difficult emotionally and financially if you do not think and plan.
Many business owners make mistakes when selling their businesses and later regret how they handled the ownership transition. Learn from the mistakes of others to improve the probability of a successful ownership transition.
5 Top Mistakes to Avoid When Selling Your Business
- Being too attached to your business
- Not having a transition plan (exit plan)
- Not allowing enough time to prepare
- Not creating a buy-sell agreement
- Not adequately valuing your business.
1. Being Too Attached to Your Business
Many business owners find themselves immersed in everything their business does. As a result, they become too involved and attached to the company and neglect to consider the inevitable ownership transition. That emotional attachment prevents them from seeing their business objectively, which compromises their judgment concerning the necessity of an exit plan.
To successfully sell your business (with the company’s best interests in place), you must distance yourself from it. Begin with emotional detachment.
Next, prepare your business to run independently without you. When you make yourself the go-to person, you force your business and employees to depend on you. This dependency reduces your business value and leads to lower sales proceeds when you finally decide to exit.
Only when you accept your eventual exit from the company will you start preparing it to run without your involvement. This may be a daunting and time-consuming task if you are too involved and too attached to the business.
2. Not Having an Exit Plan
Postponing worry about your exit from the business until it’s necessary is a big issue. For your company to go to market, it must be prepared. That preparation–i.e., exit planning–is a long process. Sometimes it takes up to five years (or more) to prepare for the transition to new management.
Exiting your business is a huge transition that requires a lot of work and effort to plan. It’s a complex process with many stages and milestones to be accomplished before you can finally exit.
Not having an exit plan is a critical mistake. Exiting by chance at whatever is offered differs significantly from achieving the desired exit by accomplishing all exit goals. In the absence of an exit plan, you will most likely suffer a less desirable outcome.
You will also benefit from considering the worst-case scenario because your exit may not be as voluntary as you expect. Unanticipated circumstances such as death, divorce, shareholder disputes, liquidation, forced restructuring, or bankruptcy may suddenly cause an owner to depart from the business.
An exit plan puts your best interests first in the event of an unexpected exit as well as a planned exit.
3. Waiting Too Long to Prepare
Maybe you do want to have an exit plan, but you either procrastinate or underestimate how long the process takes. This is also a big mistake.
Proper preparation to sell your business takes time! The sales process commonly takes 18 to 24 months to prepare your company for the sale.
Along with the planning portion, business owners need time to build more value to sell their businesses higher. Don’t be in a rush to sell your business because you can increase your company’s value substantially by focusing on its growth.
You need ample time to streamline your operations, strengthen your systems and procedures, perfect your documentation, secure your intellectual property, and prepare your staff for the transition to new management.
Failure to do these things well may negatively impact the value of your business and, ultimately, the sale price. Business owners who wait too long to prepare for the ownership transition face a time crunch and end up exiting in haste.
4. Not Creating a Buy-Sell Agreement
You may decide to gift your business or sell it to a family member or close colleague. Foregoing a buy-sell agreement in this type of transaction because you trust them is also a mistake.
Buy-sell agreements put the terms of the sale in writing. You can refer to them anytime. This legally binding contract stipulates how to reassign your share(s) as a partner or stakeholder in the business in the event of your exit.
The buy-sell agreement states what business wealth your family is entitled to receive, if anything, in the event of your death and the method to determine the value of your share(s) in the business.
If you do not have a well-written buy-sell agreement, then your estate may not have leverage in selling the stock back to the company upon your death. Assuming your estate is taxable, it will have problems paying estate taxes as it will not receive corresponding proceeds from the sale of the stock.
Or, if your estate is substantial, the company may not have sufficient leverage to repurchase the shares. The situation could turn unfortunate from an ownership perspective if the shares go to someone unprepared or who has no care for the company.
In the event of your untimely death, the interests of your company and your estate will diverge, and there will be limited options for a favorable outcome: a buy-sell agreement plans for anticipated and sudden ownership transfers.
5. Not Getting Proper Valuation for Your Business
Not getting a proper valuation may cause issues when selling because you are just “guesstimating” your company’s worth. Do not do this!
Getting a preliminary business valuation done is the first step in the exit planning process. If your current business value matches your exit goals, then you can get a good exit. If not, you need to increase your business value until it reaches your exit goals.
Not knowing your company’s actual worth, calculated as per acceptable market standards, will cost you money.
While executing the exit plan, you must get periodic valuations to know whether your value-creation efforts deliver the desired results. If they’re not, then you must make changes relevant to your exit plan so that you can meet your exit goals at the right time.
You can achieve a successful exit at your desired price and terms when you have a clear idea of your business value and when you can justify it to the prospective buyer.
How Quantive Can Help
Ownership transitions are complicated, and you need to address them strategically. Do not shy away from engaging expert help.
Contact us today to see how we can help you prepare to sell your business on your terms. We can also connect you to a partner through our partner portal.