For some owners, keeping the business in the family after they retire is an ideal outcome. Whether you’re selling to a family member who has worked in the business or a key employee, these five steps are key to a successful succession.
- Get a professional valuation of your business. As a business owner, you may have ideas about how much your company is worth. You may be basing your estimate on what a competitor or friend sold a business for, or you may just be doing back-of-the-envelope math based on sales. Either way, your family member or employee may have a different number in mind.
The only way to make sure everyone feels like the price is a fair one is to get a formal valuation from an independent third party. A broker will look at revenue and assets, but they’ll also consider things you may not realize affect the value of the business: customer concentration, the number of maintenance agreements you have, or the percentage of your sales that come from new construction. They’ll also take into account recent sales of comparable companies, which are an indicator of what buyers are willing to pay in the current market.
- Talk with your successor to make sure you’re on the same page. Once you have the valuation in hand, you can start a serious discussion about purchasing the business. Your family member or employee may have considerations they haven’t shared with you, or a different timeline than yours. They’ll definitely have a lot of questions, especially if they haven’t been privy to the full financial data up to this point. They may need time to think about their ultimate goals and discuss the plan with their family. The transition from worker to boss can be challenging, and helping them understand the realities of what’s involved is critical to making the decision to move forward.
- Plan ahead to make financing easier for your successor. Most owners think employees can’t possibly afford to buy the company because they can’t meet the SBA 20% down payment requirement. But selling to a partner may not require any out-of-pocket costs. So if you grant ownership as a partner to your successor, they may be able to buy you out without putting money down. There are stipulations, such as the length of time the employee has been a partner; the percentage of ownership must be consistent (or increase) for at least two years. The sale must also be structured as a stock sale rather than an asset sale.
- Make sure you have a clear plan in place for defining your role. If you plan to stay on in the company after the sale, you’ll need well-defined constraints regarding your authority and responsibilities. It can be hard to give up being the boss, and even the best of relationships can become strained when there are conflicts in style or judgment. It’s a good idea to have a formal agreement that covers the timeline, the structure of your roles, and other details that should not be left to a simple handshake agreement.
If your successor isn’t licensed, you’ll need to make sure that happens as soon as possible (another reason to plan at least two years ahead.) Requirements for licensing vary by state, but a key employee will almost certainly have met the experience requirements. They will need to pass the exam so they can transition the company to work under their own license.
- Hire a business intermediary to draw up documents and facilitate the sale. Whether you’re selling to a stranger or your best friend, negotiations can become contentious. A business broker can help both parties navigate the process, keep communication flowing, and help structure the deal so both you and your buyer are protected and get full value from the deal.
Selling to a family member or key employee can be a great option for many owners. Following these five steps will ensure that both you and your successor feel like you’ve made the right decision.
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