Seven Questions for Highly Effective Business Transitions
We are in the midst of a demographic tsunami with respect to business ownership transition. Since about 2005, the press has been heralding the emerging wave of baby boomer business owners who will and must transition the ownership of their businesses. The business environment for business transactions soured late in the last decade and many owners, waiting for changes in the estate tax laws, deferred much-needed estate planning activities. The bottom line is that the pent-up demand for transitions that began to emerge in the last decade will have its day. Will you, as a business owner, be ready? If you are an advisor, will your clients be ready?
In the recent past, I was retained by a Fortune 100 company to participate in seminars given to their leading dealers from around the nation. As I recall, all but two of the more than 50 owners were 55 years of age or older. The group represented a virtual laboratory of the aforementioned demographic tsunami. My topic, which covered about five hours worth of material, was titled “Thinking About Value,” and addressed the following four questions:
- Is your business ready for sale?
- What is value all about?
- Will your buy-sell agreement work?
- Do you treat your business as an investment?
The topic struck a responsive chord. We have since worked with several of these companies around the country on their buy-sell agreement planning, on acquisitions, and on other aspects of business succession planning.
After discussion with participants in this seminar, and upon further reflection, instead of the four questions above, I suggest that significant shareholders in private businesses address seven broad questions. Most of the more detailed questions that emerge during transitional discussions can be handled under one (or more) of these seven broad questions.
Seven Questions for Highly Effective Business Transitions
- Is your business ready for sale? Years ago, we began asking this question and many business owners thought we were attempting to just get them to sell their businesses. “Ready for sale” does not mean “up for sale.” It means getting your business in shape such that when an opportunity presents itself, the best possible financial outcome will result. When addressing this question, we talk about financial, operational and leadership aspects of readiness. Increasingly, business owners are open to discussing the topic of readiness, probably because so many of us in the baby boomer generation are aging and naturally thinking about transitions.
- Are you ready for your business to be ready for sale? This question is addressed not just to the majority owner(s), but to all the shareholders of private businesses and relates to things like wills, exit planning, succession planning, gifting of stock, transferring ownership where it needs to be when a sale ultimately occurs and, of course, transfer tax minimization.
- What is value all about? This question addresses the basics of business valuation that every owner needs to understand. Value is about expected cash flow, expected risks, and the expected growth of cash flows. Understanding the concepts of value allows owners and stakeholders to recognize the financial implications of not being ready for sale.
- Do you treat your business as the (major) investment that it is? I wrote the e-book, "The One Percent Solution," to address this important question. We make the distinction between liquid wealth, comprised of marketable securities of many kinds, and pre-liquid wealth, or wealth tied up in private companies. Many, if not most, business owners do not think of the value of their investments in their private companies in the same way as their other investments. Consideration of this question leads to a conscious process of diversification under appropriate circumstances – without selling the business.
- Will your buy-sell agreement work? It might not seem like such a specific question would be one of the critical seven questions for effective transitions. However, years of dealing with buy-sell agreements that simply did not work as the parties to them intended affirms that this is a key question. Every successful business with two or more shareholders has a buy-sell agreement and they exist in various family partnerships (or LLCs) and other asset-holding entities, as well as between joint venture partners of every kind. This is a question that can be answered with a “yes” if the business owners and other shareholders (partners) will work at it with the help of appropriate professional advisors.
- Are you ready to make a successful transition happen? This question does not address whether you have all your documents in place to affect a successful business transition. That was addressed in the second question. This question addresses your attitude and motivation towards a successful transition of your business. This is a “softer side” question that deals with your willingness to focus on transition objectives consistently and persistently until the transition is in place.
- What will you do after you sell/transition/graduate? It is difficult to let go when you have been in charge of a business for many years. Some people retire successfully and others simply retire. Many successful business owners don’t really retire, but rather find other things to do that are personally satisfying and rewarding. So, part of transitioning is creating options for the future. Will you walk out of one door and through another? Will you gradually phase out your activity in the business as you phase into other areas?
What You Should Do Today
As baby boomers age, more and more private businesses will transition to new ownership. We are, to repeat, in the midst of a demographic tsunami. Careful consideration of the Seven Questions of Highly Effective Business Transitions can assist business owners, their advisors and all of their other stakeholders in creating and implementing successful transitions.
Share these thoughts with your friends and clients. The questions are important. They will not go away. If you are in the middle of the baby boomer owner transition (BBOT, a new acronym?), think on these things, but not for too long. It is time to get yourself and your advisors in gear.