Transitioning Ownership of Your Client's Business
Four possibilities divulged.
April 18, 2011
Unless your clients are serial entrepreneurs who create and sell businesses, the process of "giving up" ownership of their business will be an event of a lifetime.
When you consider the outcomes of this momentous decision, it's clear that all options should be explored. Will your client's transition plans:
Preparing Your Client for the Adventure of a Lifetime
No doubt they've had some great business experience in developing the right strategies and making good financial decisions for their business. But unless one of those strategies has been to grow their operation through mergers and acquisitions (M&A), they may only have wondered what an M&A guru really does. To the extent that they have been consumed by operating a successful business, they probably have not been rubbing elbows with professional M&A advisors regularly. These are the people who will become their new best friends if they decide to sell their business to someone outside their company. And if an outside sale is not in the cards, have they identified some potential buyers inside their company who are ready to lead their business into the future?
And what about your client's well-being? Transitioning "their" business will change their life in ways that most of us can only imagine. I've seen situations in which the two-year to three-year time frame established to exit the business turns into six months or less when owners become anxious to get on with their new lives. Unfortunately, I have also witnessed situations in which the idea of not being engaged with the business fully has created serious health issues for owners. It can be like an artist creating a rare masterpiece — the prospect of having someone else enjoy and control it can be more than the artist can endure.
On the practical side, the key to a successful exit for many business owners is financial, i.e., being able to buy low and sell high, while fully realizing the value of all the sweat and tears they've invested. This aspect can be managed to some degree through careful planning, as long as those darn economics swings stay out of the way!
What's Really Possible?
When it comes to getting paid for their business, conventional wisdom is to "get the cash, get the cash, get the cash." This seems to be particularly sage advice if their buyer is outside the business. In many transactions, an "earn-out" that provides your client with the opportunity to share in the future upside of sales or profit is a good option. This can be a way to channel more dollars to the seller if the business continues to do well. With an inside sale, the seller typically has more access to information on how the business is performing post sale (especially if all the money isn't paid up front). Your client may even continue to serve in a board position or other role that allows them to place limits on the power of new owners until the purchase price has been paid out.
In an upcoming issue, I'll reveal how transitioning ownership of your client's business can become a team sport. In the meantime, rest assured that if your client has a fruitful enterprise, their ownership transition options will be many.
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