Matter & Substance
  September 14, 2021

Preparing to Hand Off Your Business

Years of hard work have paid off, and you have built a business that stands the test of time. There comes a bittersweet moment when you pause to celebrate the empire you have built, but also start planning for someone else to take over. A few weeks ago, we covered the importance of succession planning. Today, we will explore what handing off your business looks like.

Step 1 - Define the goals of the business 

For many entrepreneurs, the personal financial goal of business ownership is to maximize the value of the company and generate future cash flow to fund a comfortable retirement. The goal may be to leave the family business to an heir who will carry on its legacy or pass the torch to a new generation of leaders.

The first step of any succession plan is to define what you want your business or its sale proceeds to provide. This will ultimately drive your planning and the structure of any future transaction. Additionally, this is important information for estate planning and wealth management discussions.

If you intend to sell your business to an outside party, estimate the value you aim to receive from the sale and discuss the best way to structure the transaction with your advisory team. This will be driven, in part, by how the organization is set up. Corporations may sell stock or assets. Partnerships may be fully or partially redeemed. Do you expect to keep any minority interest, or sell the entire business outright? Will the business sale be structured as an asset sale or a stock sale? Will you plan for an installment sale, or receive payment in lump sum? These are all questions you should consider in advance of a sale.

Whether you plan to keep the business in the family or hand it off to other leadership, you should identify the new management team and decision makers. Get this group involved early to ensure a smooth transition and balance of power. This may involve carefully navigating intrafamily relationships.

Step 2 - Get your house in order

Once you set your goals, it is time for pre-transaction planning. We recommend identifying a dedicated transition coordinator to help facilitate the planning phase. This individual should be someone who can understand and consider all aspects and functions touched by the transaction, and who will take ownership of following through to be sure steps are timely and accurately completed.

A few key areas for you and your coordinator to consider now include:

  • Clean up financial statements – To properly value your business, either for sale or for transfer, you need accurate financial data. Clean up your books by reviewing your fixed assets, any lease/rent agreements, and values of any deferred assets or liabilities and accounts receivable/payable. If you operate a cash dominated business, set an “observation period” to use as a reference point for estimating and projecting cash flows. This will make your company marketable should you seek outside buyers, or easier to transition internally.
  • Enlist the help of HR – It is never too early to prepare your management and team. Your HR department, who provide invaluable assistance in recognizing potential issues – can help offer solutions to issues before they arise. If you do not have a HR professional on staff, now is a good time to find one. Human Resources should be tasked with creating new policies to guide the organization – and in coaxing management to adopt and enforce them. Retaining top talent must be a priority, and making necessary cuts sooner rather than later will help avoid adding to the disruption the transition may already cause. Clear, open and well-planned lines of communication will keep your team feeling secure.
  • Be mindful of key relationships – The years of bonds you built with customers, clients, key vendors, referral sources and contacts should not retire along with you. It is up to you to prepare the business to maintain these vital relationships after you leave. This includes introducing fellow management and deepening the relationships with your company and brand. Starting early can make the transitions feel more natural – the last thing you want is for a client of 30 years to feel abruptly deserted. Work to ensure the goodwill you have built in these relationships carries over to the next generation of management. 
Step 3 - Set yourself up for success

Chances are, you did not build your business alone. With advice of your advisors, help from key relationships, and support of your team, you realized your vision. Accordingly, you should not expect to handle such a large transition alone.

Set yourself up for success by enlisting help. Whether you are expecting family, fellow team members, or an outside company to take over, you can start strengthening those relationships and leaning on others now. Involve a team of your trusted advisors – from accountants to lawyers, business advisors and technology service providers. Remember, it will be up to you to ensure your team works together to find and implement the best answer. As always, we are here to help! Reach out to your M&S Advisor today to start the conversation!