Succession Planning Transfer Strategies – Selling to a Third Party
THE COUNSELOR
Volume 11 • Issue 7 • July 2021
The Counselor is a newsletter of Hallock & Hallock dedicated to providing useful information on estate planning and business planning issues. This month's issue is the third in a series discussing transfer strategies that can be employed as part of a succession plan. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.
Sometimes the best thing you can do is build your business to sell. While many family business owners want to transition their business to the next generation, often they find this impossible. In that instance, the best succession plan is to sell to a third-party outsider. Because you can’t know from the beginning how succession will go, it is important to build your business to sell. This way if succession to a child or other insider cannot happen, you are prepared to pivot.
The Pros and Cons
According to John Brown in his book, How to Run Your Business So You Can Leave it in Style, there are several advantages and disadvantages to selling to a third party.
Some of the advantages include:
You can get cashed out.
You don’t have to worry about how to treat your children equally because you will have cash.
You often get more cash than you were expecting or could have received otherwise, especially in hot markets.
What are some of the disadvantages?
The personality or culture of your business will change. No matter what promises are made, this is almost inevitable.
If you finance any portion of the sale, the risk is significant.
Another disadvantage is finding a market, especially if you are a smaller business. While there are clear paths to market for larger businesses, the path for a smaller business can be much more challenging and the professional help less available.
Are You Ready?
One of the more challenging aspects of selling to a third party is preparing the business to sell. Often bookkeeping is sloppy, personal expenses are being run through the business, systems and processes are non-existent, and so on. Much of this is because the business is really the alter ego of the owner. If you wish to exit your business by selling to a third party, you must prepare the business for sale.
In his book, Built to Sell, John Warrillow offers several tips for building a business that will sell:
Don’t generalize; specialize.
Don’t rely too heavily on one client.
Owning a process makes it easier to pitch and puts you in control.
Make sure your business can run without you in charge.
Create a positive cash flow cycle.
Don’t be afraid to say no to projects.
Hire people who are good at selling products, not services.
Build a management team and offer them a long-term incentive plan that rewards their personal performance and loyalty.
Don’t issue stock options to retain key employees after an acquisition. Instead, use a simple stay bonus that offers the members of your management team a cash reward if you sell your company.
If you think you want to sell your business, ask yourself these questions:
Why does this method appeal to me?
What are the pros of this method for my business?
What are the cons of this method for my business?
Am I willing to put in the time and effort to prepare my business for sale?
If you are still ready to sell after considering these questions, seek the help of good exit planning advisors that can help you value your business and determine what needs to be done to get it ready to sell.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.