Nearly 20 years ago, Richard W. Hayman completed a successful sale of Hayman Systems, his family’s Washington, D.C.-based cash register manufacturing and distribution company. It was the culmination of a decade-long plan to grow and transform the company to increase its value.
“In 10 years we went from being an old, stodgy register company with a good record to a growing software company with great potential,” Hayman says. “Then I sold the company. We made a plan and executed it—it worked out perfectly.”
Hayman’s story is one business owner’s example of how careful planning can help achieve a smooth business transition. Here are four steps to take as you begin the process.
1. Ask the right questions
Don Matheson, a North Carolina-based independent management consultant and CEO of NorthStar Management, specializes in small business transition planning, including strategies to increase sustainability and profitability. He explains that owners typically decide to make transitions based on one of two motivations: financial and emotional. Financial factors might include market conditions, competition, funding, or the viability of a product or service, while emotional considerations could include concern about family assets, reputation or personal needs.
Regardless of the main underlying factors, once the need for a transition becomes reality, Matheson identifies three important questions to ask:
● What are the goals for you and your family?
● What are the goals of your company?
● What do you want to happen to your business when you are no longer involved?
Once you’ve covered these big-picture questions, you can start thinking about more specific questions, such as:
● How much control and decision-making power do you want moving forward?
● If you are passing on the business, who will be your successor?
● What is the current value of your business? What is its potential value?
● What is the state of the economy? What is the landscape in your specific industry?
● How will a change impact your employees and your company’s culture?
2. Start early to identify your options
As Hayman notes, he started his transition plan about a decade in advance of his eventual sell date. Matheson recommends owners start making exit plans at least three to five years before the transition. “The earlier an owner starts the process, the more control they will have over it,” he says. “More time means more in-depth thought, which means better decisions and, ultimately, better outcomes.”
As part of transition planning, you must consider all exit options and how they will impact your life after ownership. For example, if a family member or a current employee takes over the business, you likely will have a larger role than if you sell to an independent third party.
Transition options include:
● Passing on the business to a family member or employee
● Pursuing a management buy-out
● Selling to a competitor, investor or equity firm
● Liquidating the company
3. Form a trustworthy transition team
Any strong exit plan should include research and knowledge about economic trends, the state of market conditions, and your company’s market value. Matheson recommends forming a transition team that includes financial advisors, consultants, accountants, lawyers, insurance agents and marketing experts.
“The idea is to generate as many ideas as possible so you discuss and develop formal and informal plans, as well as a map for the future,” Matheson says.
4. Settle your personal finances
A last key step for owners is having a thorough and realistic understanding of their personal finances—particularly 401(k)s. Getting his finances and bookkeeping squared away paid off significantly for Hayman as he was preparing to sell his family business.
“Once the sale was lined up, we had all our paperwork in order, including years of certified, audited financial statements,” Hayman says. “We went from offer to closing in less than 90 days."