Five things to remember when transitioning business ownership

There’s no one-size-fits-all way to transition a business to a new owner. The type of business and its customer relationships can dictate a very short or lengthy transition period. But in either case, it’s critical to thoroughly plan to minimize potential hiccups.
“There is lots of minutia and details that need to be mapped out. And even if you plan things out, you still can run into trouble. But mapping everything out will help smooth the ride,” says Adam Spiegelman, wealth management advisor at Northwestern Mutual.
Smart Business spoke with Spiegelman, who is taking over his father’s practice, about overseeing a sound business transition.
How do the right buyers and sellers connect?
Thoroughly explore and know exactly what you’re getting yourself into. For buyers, that means looking at the risks of the business. How much travel will be involved? Are customers getting discounted rates that you will have to live with when you take over? How established are the client relationships, and are they easily transferable? Is there potential for new business with existing clients? Does the company have good accounting records? Can you understand the cash flows and current expenses? What is the staffing model? What types of relationships does the staff have with clients?
If you’re selling, research all your options to find the right buyer. A family member or key employee can be more of a proven entity than a third-party because you know their work habits, work style and personality.
What’s important to remember about valuing the business?
There are several accepted methods for valuing businesses. Your CPA can run through the numbers, but he or she might not be well equipped to value your business. You’ll want to get a proper valuation — maybe even more than one from a professional valuation company specific to your industry. If you’re the buyer, however, keep in mind that all business valuation companies would like to broker your deal, so they can tend to overvalue the business a little bit in order to please the seller.
As a seller, you can increase value by cleaning up your books, making sure relationships are solid and ensuring a good accounting system is in place to best depict cash flows for potential buyers. Also, try to trim the fat on your infrastructure so the business is lean from an expense standpoint.
What have you learned about the actual transition itself?
In addition to a business agreement that any buyer and seller should have, put contingency plans in place. If during the transition — however many years that may take — one partner becomes disabled, what happens? Does the seller have the first right of refusal to buy back his or her business? If there’s a death, do you have life insurance to cover that death or does the owner’s spouse get involved and work with the new buyer?
Also, clearly establish your roles from the get-go. What type of role does the old owner play in the new business? Who will run meetings? Who will talk to clients and distributors? Who will work with staff? Make sure you put steps in place to resolve disagreements, such as having an outside adviser you both trust arbitrate.
How can you best transfer client and staff relationships?
Don’t underestimate the time a transition takes. Delicate issues are involved, especially in a family business. Professional business transition consultants can work with you, acting like a mediator, helping you plan and holding everyone accountable to ensure you’re both meeting goals. A good business attorney and accountant can help as well.
During the transition period, a buyer might want to put golden handcuffs on the former owner to keep him or her in the game. With these incentives, the seller is available to mentor the buyer and help bridge relationship gaps.
What surprised you the most?

The biggest ‘aha’ moment was understanding how difficult it is for the seller to give up control. For a former owner to take on a lesser role, letting go emotionally, is very challenging.

Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiaries.
 
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