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Selling a Business – Small Business Succession Planning

By Howard C. Stross
October 09, 2013

Most small business owners are proud of the companies they built with their blood, sweat, and tears. Many feel satisfied about what they have accomplished through hard work, determination, and innovation. As they grow older, they might envision handing the business to someone else who will take it to the next level. Perhaps they would be satisfied selling their small businesses at a great profit and start work on their bucket list. This article continues our discussion of the basic steps of small business succession planning.

Small business management is a demanding job, but it can also be very rewarding. According to Entrepreneur magazine, a recent poll found that 55 percent of small business owners are extremely happy with their choice of opening a business for themselves. The same poll found that the majority of small business owners have no plans to sell their businesses. This poll reported that 34 percent of respondents said they plan to run their businesses indefinitely, and another 25 percent said they would sell only if offered a price they could not refuse.

Despite wanting to keep running their small businesses, every business owner needs an exit strategy, not just for retirement, but also, a business owner needs a contingency plan in the event of sickness, accident, or untimely death.

Unfortunately, as the above poll shows, few small business owners think about succession management planning. Through a series of articles, we have been discussing the myths family business companies have about what it takes to successfully hand off the reins. Continuing that discussion, below are more myths about small business succession.

Myth Number 5: Selling a business is easy.

When you decide to sell your business, finding a buyer is not as simple as posting a For Sale sign and waiting for offers to roll in.

There are many questions to consider before beginning. What will the sale price be? Who will help you sell it? Will you sell it yourself? How do you sell it? All cash? Would you keep an equity position? Would you accept a loan arrangement? What if the new owner wants you there for a while during the transition? What would be your terms for that participation?

Start with setting the value of the small business. Fair market value has been defined as the price at which property will change ownership between a willing buyer and a willing seller, neither of whom is under a necessity to buy or sell.

Determining the value is not an easy process. Timing influences the value of anything, including the selling or transferring ownership of a family business.

Some companies base the value of their businesses on an average of the past three years of revenue, the cost of assets, the margin for profitability, and whether or not the business is turnkey, that is, if ownership can be transferred without any complications. Establishing the value of a business is challenging because it is not a one and done activity.

Whether the goal is selling a business or transferring business ownership to family member, it is essential to obtain up front an independent valuation of the small business. This means documenting how the business valuation was established and then periodically, without fail, reviewing the valuation to make adjustments.

Myth Number 6:  Your Successor Will Appear When You Are Ready

When are you planning to leave the small business to someone else? It could be a year or a decade from now. Will someone be waiting to step in when you are ready to leave? Who is going to buy your small business? We have already discussed in a previous article why your children may not be the buyers of the family business. One or more may not want to own the family business at all. Or, they may not be able to run it successfully. To develop a plan of succession, one must do so with a defined successor.

Myth Number 7: The Business Handoff Will be Easy and Clean Cut.

Developing a plan of succession is not enough. To ensure the greatest success during the transition to the new owner, you must also teach the successor. The most successful transitions take time. The small business owner who is leaving should stay involved in the business to help the person who assumes the reins, at least in the beginning.

The successor should be introduced to customers, vendors, bankers, insurers, and professional advisors, the entire circle of people important to business success. They should all be familiar with the successor in order to ensure a smooth transition.

Knowing the technical details of the small business is important. The successor, like the original small business owner, must have mastery of the nuts and bolts of running the business. Just like taking ownership of a new home, there are a myriad of details the new owner should understand in order to spend less money finding out what could easily have been learned from the former owner.

A long lead-time for training is a big part of a succession plan. Even if you think that your retirement is years away, you can start planning now to give yourself enough time to train your successor. When you finally hand over the keys, you want to be able to take that long vacation, hike the Appalachian Trail, or do something else on your bucket list.

This is the third article in a series of articles about small business succession planning. Click here to read the first article. The second article, which discussed children as part of family business succession planning, can be accessed by clicking here.

This article is not intended to provide legal advice. The facts of your situation are unique and you should seek the guidance of a business law attorney. Call us at 813-852-6500 to schedule a free 30-minute consultation with a business lawyer.

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