Ending a business is usually the last thing a business owner wants to think about. However, succession planning should be a top priority of business planning. This is because it is important to think how you are going to build the value of your company. How you plan to end your company may be a necessary part of how you plan to start your company. Are you building something to sell? Are you building a legacy for your children and grandchildren? Are you using this business to retire?
According to the Guardian, small business owners are placing greater emphasis on building a legacy than they have in the past. Many small business owners are counting on selling their businesses at some point. However, only 33% of businesses are successfully transferred to the next generation and only 20% of businesses listed for sale actually sell.
So how can you increase your odds? Here are five tips to get you started.
1. Prepare Your Documentation
First, you need to have a consistent paper trail. This means having proper documentation of monetary transactions, employee files, and contracts. It has been my experience that when small business owners are ready to sell their business, they rarely have things in place to show potential buyers what they may want and need to make a good decision.
Make sure that your tax returns or not completely separate from your profit and loss statements. They should be close in numbers. Make sure that you have a good filing system. You should be able to determine which contracts are exclusive and which are not.
You should also have proper employee files. Make sure that you have properly tracked any and all benefits you have and will provide to your employees.
2. Talk to Your Children or Grandchildren
Second, you should discuss with your children or grandchildren the possibility of taking over the business. Do not assume that this is something they want. If they have never operated in the business, then they will not be able to successfully run the business.
Even if you don’t plan to hand over the business to a family member, you should have a written plan or guide of various business processes that are used. This will help the new owners replicate the success of your business and keep the business moving forward.
3. Train Managers
Third, you should make an effort to train managers and others who can run the business without you. This is not only helpful for you to be able to take a vacation once in a while, but it will go a long way for potential buyers.
Having a trained manager who knows the ropes and can assist with running the business after you are gone will make your business more attractive to buyers. Who knows, maybe the person you have been training will want to buy the business from you!
4. Consider Your Business Structure
Fourth, you should consider the structure of your business. Determine if the structure of your business will allow for its sale. If you are a sole proprietorship, the business itself cannot be sold. However, if you have a corporation or limited liability company such entities can be sold intact.
5. Evaluate Your Assets
Lastly, consider the assets of the company. Are the assets in your name or the business name? Are there lease agreements in place for equipment and/or liens? Understanding what the business owns vs. knowing what you own personally is important to the valuation of the company.
There are many aspects of buying and selling a business. Doing the work before you’re ready to sell or transfer the business will go a long way in helping you increase the value of the business and finding interested buyers.
Shahara Wright
Shahara Wright is a CEO, business law attorney, professor, community leader, speaker, and author. For more than 17 years, Shahara has provided small and mid-sized companies with legal and business strategies including entity formation, mergers and acquisitions, investor packages, and contracts. She has experience with product development, bringing products from mere concept to a fully developed and manufactured brand. Shahara founded The CEO Effect, LLC to work with small business owners who want to position themselves to accelerate growth.
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Thank you for posting this. I like what you wrote at the end of number two. Having a written plan or guide of the way you operate your business is great for the new owner. It will bring them up to speed and help to ensure that there are no hiccups when transitioning.
There is a natural conflict of interest between buyer and seller starting with the deal structure — asset purchase, equity purchase, earn out opportunity, and more. The equalizer in these conflicts can be transaction valuation.
James, I am not sure that I would call it a conflict of interest. Sometimes both parties are clear about the structure of the deal. Sometimes buyers or sellers do not know the difference. I think the structure is easier to determine than the value of the business.