Preparing for a Business Transition

Transitioning your business to a new owner is not always as easy as just handing over the keys. There are many things to consider, organize and prepare before making the transition – both emotionally & financially. Over the last 4 years of connecting buyers and sellers, I’ve noticed 2 things that are extremely important to those who are selling their business: 1) They truly care about having their legacy carried on; 2) Selling to the highest bidder is not always their goal. Check out these 8 steps for a successful business transition:

Identify the key attributes of the business and make sure that you can deliver them

Knowing what makes your business tick and thrive, and being able to explain and teach your methods to the new owner will help to ensure that business does not suffer during the transition and also gives the new owner confidence in their decision to purchase the business.

Document the business plan and forecasting

A well-documented business plan and forecast is the road map to taking the business in a particular direction. Setting goals and objectives is one thing, but determining the steps needed to accomplish these goals is quite another. The planning process allows the entrepreneur to determine what might or might not work. For example, a business owner may research the idea of opening a chain of stores only to discover that franchising is a more effective way to expand the business. Likewise, in a start-up situation, an entrepreneur may discover during her market research that her hometown is not large enough to provide a sustainable market for her chosen endeavour. She can then consider a different type of business, or start her business in a different location where she can prepare a realistic and effective forecast for the business.

Maximize and stabilize profits

Consider leasing equipment when the benefits outweigh the cost of buying, storing, maintaining, and insuring equipment that could be technically obsolete in just a few years.

Be conscious of exactly what is being spent on equipment, as these capital expenditures could be substantial. Keeping track of expenses with a spreadsheet is a smart way to increase profits, and also keeps track of how the business is doing against the objectives initially set by the entrepreneur. Set realistic goals and plot a long-term strategy for success.

Other smart things to think about are to collect accounts receivable promptly and stretch payment of accounts payable as long as possible; make sure inventory is all salable; and ensure payroll, which is a controllable expense, is monitored frequently.

Clean up the balance sheet

Ensure the following is accurately represented on the balance sheet as these accounts represent the calculation of the current ratio which represents the liquidity of the business.

• Assets: Cash, accounts receivable, inventory, deposits, and prepaid expenses
• Liabilities: Accounts payable, accrued expenses (those not yet paid), and the current portion of any loans (interest, and perhaps some principal)

Document and update contracts/agreements

Keep up to date agreements with suppliers, employment contracts, operating and capital leases, office lease agreements and foreign exchange contracts.

Ensure transparent financial reporting

The word “transparent” can be used to describe high-quality financial statements. This term has quickly become a part of business vocabulary. Simply put, it represents financial reporting that is: “easily understood,” “very clear,” “frank” and “candid.”

It relates to businesses which have financial reporting with fuller disclosure, which will win more trust from a potential buyer. Relevant and reliable information means less risk to the potential buyer and thus a lower cost of capital, which naturally translates into higher valuations.

Develop a management succession plan

Developing a management succession plan will make for smooth transition, with minimal headache. Be sure to lay out all of the details you need to make sure your business can be taken over with confidence and ensure continued success. Also, do not forget to plan for key management positions and their transition. It is critical to have clear and transparent communication about your transition with family, key management and key stakeholders to ensure there are no hiccups along the journey to selling and exiting from your business.

Start tax and legal planning early

Some things to consider when planning ahead are: estate tax planning for succession, key man insurance for key employees of the company, proper shareholders agreements and an appropriate income tax structure in order to minimize both corporate and personal income tax.

Also, this checklist may come in handy! And yes, as a valued reader & potential seller, take advantage of BizON’s 15% discount 

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Nunzio Presta

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