Business Ownership Transitions 101

Posted by Trent Willihnganz on Aug 19, 2016 05:00:00 AM

Topic: ALL

Team discussing their business work

There are many factors a business owner should consider if they decide to transition ownership of their company.  Determining who the business will transfer to is a major component of this decision.

  • Is the business a multi-generational company they would like to see it stay in the family? 

  • Have they developed a strong management team that is interested in owning and operating the company? 

  • Has a relationship developed with a customer, supplier or competitor that wants to acquire the company? 

  • Does ownership want to sell the business through a third party advisor such as a Merger & Acquisition specialist?

Here is a list of the most common ways business ownership can be transitioned: 

  • Family Transfer –  Transitioning ownership to a family member(s).  This type of ownership transition typically takes more time as sales proceeds are usually received from future cash flow of the business.  Family members and key employees need to be developed early to ensure a successful transition.  The sale price/value of the company can be impacted by the close relationship of the parties.    

  • Key Employee(s) / Management Buyout – Like a Family Transfer, key employees need to be developed early to ensure a successful transition.  The sales price/value can also be impacted by the close relationship of the buyers and seller.  The buyers may have worked with the seller for many years and played an integral role in the company’s performance and operations. Value is often determined by a business valuation and seller financing is often needed to fund a portion of the buyout.  An Employee Stock Ownership Program (ESOP) is another way an owner can transition the business to employees. 

  • Non-related, synergistic third party –This type of transition can take place a number of different ways.  The seller could sell directly to the buyer, use a business intermediary, such as an M&A Advisor, to market the company.  Potential buyers can be strategic and include competitors looking to grow, customers looking to expand their capabilities or suppliers seeking to expand revenues and/or margins.  To the extent possible it can be beneficial to get to know your competition.  Working with a competitor can help identify a buyer and could allow the two businesses to join together to take on larger jobs by adding capacity that a business’s current operations may not be able to handle. Working with an M&A Advisor can allow a seller to confidentially reach buyers and potentially obtain maximum value for their company.  An M&A Advisor can reach buyers that the seller may not be aware of or comfortable approaching.  Value is again typically determined by a business valuation and competitive market conditions.  

  • Private Equity – Investors direct funds through investment bankers skilled at identifying and purchasing businesses with upside potential. Private equity groups may be able to bring capital for growth, capital expenditures, recruiting key employees, etc. that may help the business achieve its potential faster. Private equity groups will supplement and coach management to maximize the potential of the company.  It is important to understand expectations when working with private equity groups.  

Whether the business is being transitioned within the family or sold to a non-related third party there are a number of things that should be done early to ensure a successful transition.

  1. Develop key employees and/or family members so they have the ability to manage the finances, operations, human resources, and key customers.

  2. Diversify company revenues so that the business isn’t reliant on a few key customers that may have strong relationship with the seller and be at risk of retaining post sale.

  3. Maintain consistent revenue. Buyers like to see that company revenues aren’t reliant on a single customer or employee.  It is important that going into the ownership transition the company is trending positively.  Consistent and growing revenue and margin/expense control are important to not only obtain value during a sale but also help the buyer obtain outside financing.

Most sellers want to see their business succeed after they are no longer active in the company yet also obtain the maximum value for their business.  Both of these objectives will be accomplished with thoughtful planning and an early start to preparing for the transition.