Many small businesses drop out of existence when the owner is ready to retire. Small businesses have a value and should be “groomed” to be taken over by a new owner and to provide the seller with additional income, either as a lump sum or over a period of years.
All owners should manage their entire operation with the thought in mind of selling the business at retirement, or sooner. The achievement of this goal requires a business to maintain accurate books, income and expense statements, as well as a systematized office procedure. Even by doing all this a buyer may be hard to find. Every small business is unique and a buyer that is unfamiliar with the product or service offered and the market place it caters to, may find it difficult to succeed.
Once a target date is set for retirement or for the sale of a business, several steps have to be taken. It is important to mention that, in my experience, at least three years are needed to prepare most existing small businesses for sale.
My first recommended step is to call in a professional business broker to evaluate the business in its current condition. The lessons learned are many:
- Is this a saleable business?
- What documentation is needed to sell the business?
- What is the current value of the business?
- How would a sale be structured?
- What is the survival rate of like businesses once they are sold?
The answers to these many questions will help determine if the business can or should be sold on the open market. Sometimes a different approach is necessary, and that is “growing your own buyer”.
With a minimum of a three year start the process of growing a buyer can be implemented as follows:
- If the business has employees, an evaluation of their capabilities and desires may identify one as a potential successor.
- If there is no employee available to groom into a potential buyer, then it’s time to look outside of the business; options include:
- Interview and hire an employee with that specific goal in mind.
- Look at similar businesses with the thought of hiring one of their employees
- The potential buyer has to know that he has an opportunity to learn the business and to buy the business at the end of a certain period.
- A well designed training process is essential to have a successful transition to the new owner.
The services of a business broker may be needed again to help determine the current value of the business. If at all possible, a cash sale is the most desirable. If cash is not available, then an initial down payment should be agreed upon and the balance paid on a monthly basis. The transaction should be handled by a business broker or attorney.
I always recommend a new business plan when an owner enters into this phase of his business life. We develop the plan along with an interview process for selecting the potential buyer as well as a training program during the transition period. Also included is a format for the initial agreement and performance expectations of the future owner.
Leaders don’t create followers, they create more leaders. Tom Peters
Nick J. Petra CFP www.strategicduck.com subscribe to this blog and be the first to know about the great business event coming the 2nd quarter of 2013.