Whether your succession plan includes a sale to a third party, or to an insider, there are significant risks involved. Selling your business to someone on the inside is usually safer than selling to a stranger. And, when you and your skilled advisors execute a carefully designed and implemented sale to an insider you can reduce the risk most significantly.
Let’ look at some steps that you and your professionals can take.
Take Your Time. You and your buyer will need between 3 and 8 years to plan, implement and pay for the transfer of your company. No Kidding. If you don’t have that kind of time – or you don’t want to take that time, work with your advisors to design a different type of exit strategy.
Learn. This is no time to make things up as you go along. Choose professionals – an accountant and a lawyer among others – who know the ins and outs of company transfers. Look for networking groups and seminars that will boost your know-how. Beware of learning just enough to be dangerous. Make the commitment to become an expert.
Build Your Cash Flow. When you transfer your business to an insider, the company’s cash flow will be—at least at the beginning—the only source of the money that you will receive. Really, it is like paying a no-show employee. If you business can’t generate the cash now to pay an absent, highly compensated employee, then you have some serious work to do before you make that transfer.
Maximize Your Value Drivers. Evaluate these 8 key factors because your inside buyer can only succeed if the business’ value keeps growing:
1. Your Customer Base. What is their buying trend? How much of your customer base is junk? What is their buying trend over the last five years? How many new customers have been acquired annually over those same five years? How stable is that customer base? What vulnerabilities exist?
2. Your Recurring Revenue. Your repeating revenue is much more valuable than your one-time sales. Build those repeat sales.
3. Your Product Line. Is it varied? Is it well integrated? Are your products complimentary and competitive?
4. Your Gross Margin. That’s the most important line item on your Profit & Loss.
5. Your Intellectual Property. That includes your patents, trademarks, and copyrights but it also includes things like a unique way to generate sales leads, or an effective way to close Internet sales. What do you know that your competitors don’t? That’s Intellectual Property and it can help your inside buyer be successful.
6. Your History and Your Reputation. This is also known as “good will.” If your company has a great reputation with customers, competitors, and the community, your buyer has a better chance of success and you have a better chance of getting paid.
7. Your Sales and Marketing Effectiveness. Are you using the same old sales strategy that you put in place in 1983? That won’t help your inside buyer. Make sure that your marketing techniques are state-or-the art. Check those close ratios – is your sales force still the super team that it was five years ago? If so, make it better.
8. Your Ability To Fight The Competition. The longer your inside buyer can hold off the competition, the more likely the business is to succeed long after you’ve gone. What are your products true advantages? Do you have a big technical edge? Build your stash of secret weapons.
Make Yourself Expendable. If you’re going to sell to an insider, your buyer should be better at what you do -- than you are. Not only that, but they must be ready, able, and hungry to take on the debt necessary to own the company themselves.
Define Your Goals. Know what your really want, and what you won’t settle without. When your plan is properly designed, your goals will be met before you make the transfer. Write down what you want, and think about these:
· Financial Security
· A set “walk away date”
· Keeping the company legacy
· Rewarding your key people
· Using someone else’s money to bring the company to the next level.
Keep Taxes To A Minimum. You must structure the sale to make sure that the company’s tax in cash flow is kept to a minimum. Otherwise, your buyer is effectively taxed twice. If you do it right, you can save about 1/3 of the company’s cash flow, which increases your chances of getting paid.
Transfer Ownership One Step At A Time. Make sure that you stay in – or near—the driver’s seat until you’ve received the entire sales price. Maintain voting and operational control and shift the risk the new owners. That way, if performance falters, or the new owners decide to throw in the towel, your company will survive.
Write It Down. Once you’ve thought through your plan, you need to write it clearly and communicate it to your eventual owners. Otherwise, nobody will take it seriously. Also, and more importantly, the written plan is what you and your professional advisors will use to coordinate what you do to make your plan a reality. When you include a time line in your plan, you are even more likely to see it succeed.
Don’t Forget To Dream. Every once in a while, sit back and imagine how wonderful it will be when you successfully transferred the business that you started to the next generation. What a success!