Running a privately held business is a monumental challenge. Business owners face a multitude of interconnected issues every day, requiring keen decision-making skills. One critical issue they must address is the future ownership of their business. Are they taking actions today that will increase the likelihood of finding someone capable of running the business in the future? As a strategic exit planner and Certified Public Accountant (CPA), I understand the importance of preparing for a smooth transition. In this blog post, I will introduce five essential steps to help you create a transferable businessâ„¢.
Step 1: Adopt an Exit Planning Process and Mindset
The first key to creating a transferable businessâ„¢ is to adopt an exit planning process and develop a mindset that focuses on taking action in that direction. An exit planning process helps owners understand their goals, assess their readiness, and determine the exit option and valuation that will yield the best result. Each owner and company have unique goals, and the process provides clarity on how to achieve them. By committing to an exit planning process, you develop an exit mindset that considers both the future and the actions you can take today to make your vision a reality.
Step 2: Measure and Manage Your Company's Owner Dependence
To create a transferable businessâ„¢, you must assess and manage the degree of dependence your company has on you as the owner. A transferable business can be owned and operated by someone other than yourself or your partners. Many privately-held businesses lack transferability because they rely heavily on the owner's indispensable involvement. Therefore, measuring and managing your level of engagement in the business is crucial. Consider factors such as decision-making authority, personal expenses paid by the business, establishment of independent systems, and the presence of a reliable and empowered management team. High dependence on the owner reduces the transferability of the company.
Step 3: Assess Your Current Management and Support Team
Evaluating your current management team is the third step in creating a transferable businessâ„¢. The quality and depth of your management team directly influence your owner dependence ranking. Have you hired and empowered managers with key roles in your company, or do you believe it's easier and more profitable to handle everything yourself? A transferable business requires the right people in the right positions, supported by incentive plans that align with the company's success. Investing in a capable management team increases the transferability of your business.
Step 4: Understand and Evaluate Your Industry
Transfer Statistics Gaining an understanding of how businesses typically transfer ownership in your industry is the fourth step. While developing an exit mindset, reducing owner dependence, and building a strong management team are essential, they don't guarantee transferability. Until a qualified individual with the necessary financial and business acumen is identified, your business may not be transferable. Furthermore, outdated industries may struggle to attract interested investors or individuals. Understanding how companies in your industry transfer ownership reveals the demand and potential value of your business.
Step 5: Review and Act Upon Your Company's Relative Performance
Profitability drives the value of a business transfer. Understanding your company's profitability relative to others in your industry is key. Companies with lower profit margins may find it challenging to transfer ownership, as potential buyers often have alternative options available. If your profit margins are inferior to those of competitors, buyers are likely to choose their businesses instead. Conversely, companies with superior profits have greater transferability. Reviewing your company's relative performance and taking action to enhance profitability are critical steps in creating a transferable businessâ„¢.
Conclusion
Creating a transferable businessâ„¢ is a topic of great interest to many business owners. By following these five steps, you can lay the foundation for a smooth transition and increase the transferability of your business