Before you exit your company, it is important to transition the leadership role over to the new head of the company. Gregg Kunz discusses how to secure your legacy and transition leadership responsibilities and more in the final two chapters of “Lucrative Exits.” When you leave a company it can still have a lasting impact, which is where entrusting a new leader and establishing your legacy before you depart becomes vital.
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CHAPTER ELEVEN
Transitioning Leadership and Legacy
As business owners approach the finish line of selling their enterprise, they often envision the conclusion as a definitive end to their journey. However, the reality is that the closing of a sale is the beginning of a new and critical phase: the post-closing and transition period. The pressures and stress of getting to the closing table may result in a post-close, post-celebration “hangover.” The seller is relieved that the deal is done, and the buyer likely feels the excitement of ownership and the weight of what lies ahead. Where do they start? How do they announce the change of ownership to the staff that is now theirs?
Over many years, the seller established a clear and regular cadence of their workday. They prioritized and addressed their daily activities with a familiar, comfortable routine, and probably without much thought. For them, it would simply be another day at the office. For the buyer, this is entirely new territory.
In the days leading up to the closing, most of the focus has been on getting the various documents assembled and submitted to get the deal done. The seller is mentally ready to walk into the sunset to enjoy the freedom and flexibility they envisioned. In all likelihood, very little focus or planning has gone into this critical next phase. The Training and Transition agreement in the closing documents outlines the duration of the training and transition period. Still, it lacks both formality and an organized outline of all that needs to be accomplished in an orderly and logical manner.
Further compounding the challenges ahead are sellers’ and buyers’ personalities and “work styles.” If little to no planning is paid to this phase, both parties will likely become frustrated, and the rapport built during the past months will be diminished. The best way to ensure the smoothest and most effective transition period is with a plan. This plan should include a general outline with timeframes agreed to and documented by the participants.
The first step in this discussion must be to communicate the importance of having a plan and that both parties must work together for the best results. The seller is the veteran expert, and the buyer is the novice newcomer to the party. Each must understand that patience and a sense of purpose will help this process.
Training and Transition
The transition period typically begins with the change of ownership being announced to the employees. Once completed, the seller will walk the buyer through the business’s daily operations, how the product or service is sold to customers, how orders are placed with suppliers, how the accounting and business management system operates, and opening and closing procedures. Much of the education process is incumbent on the new owner to revisit the many operational processes and procedures the business has established for day-to-day operations.
The seller must understand that years or decades of experience and knowledge must be conveyed in a short yet critically important period. The buyer must know they have a short timeframe to complete the training and transition period. Depending on the buyer’s experience with the business or industry, the period may last from several weeks to several months. We typically see no cost associated with the period unless the duration is more than 30 calendar days, after which the parties may agree to an hourly, daily, or fixed rate. The initial portion of the period is usually done in person and on-site, after which phone and email support will make up the balance.
As one might expect, the ongoing presence of the prior owner can create some uneasiness or questions about who the staff should be reporting to. I have found that the new owner is ready to take charge after the first week or two, and the seller’s time commitment falls off dramatically. It goes without saying that the seller should help the buyer as much as possible for a smooth transition.
Buyers must remember that how they treat the seller during the previous sale process will likely impact them during the transition period. Antagonizing the seller during the process rather than building goodwill will diminish the transition’s effectiveness. The seller may limit their activities to only meet the requirements agreed to in the closing documents and no more. Collaboration and building trust between the parties is paramount to a good relationship post-transaction.
Only a few months ago, one of my seller clients called me two days after the closing in a state of frustration and concern. He arrived at the office ready to begin the transition, and the buyer spent the first three hours on the phone speaking with utility providers, the owner’s banker, friends, family, and their investment advisor. The buyer should understand that the training and transition period has a firm beginning and ending date and that this time must be used wisely.
Tips for Avoiding Post-Closing Challenges
- Sellers should not be expected to actively manage the business while the new owner is in training. The buyer is now fully at the helm of their new ship.
- Sellers must not forget or resent the amount of time they committed to for the training period.
- Sellers should diplomatically defer to the new owner for decision-making and staff communication.
- The seller must understand that even though the transaction has been completed, they are legally bound and responsible for providing the training and transition as outlined in the agreement.
- Remember that in the excitement leading up to the sale, each party may cheerfully agree to one arrangement only for the seller to find it a burden later or that the buyer expected more from the seller. As documented in the Training and Transition section of the closing documents, clarity of expectations is critical.
- The best way to minimize conflict and maximize the effectiveness of the transition period is to build upon the relationship fostered during the sale process.
- A wise broker will remind the parties that they will be working together after the sale is completed and will check in with each party in the following weeks to provide a quiet word to each party if and as needed.
New and Unfamiliar Roles
Sellers will likely face various emotions once they part from the business. Despite their eagerness to move on to the next phase of their lives, they may feel a general sense of loss: loss of power, identity, and control over their daily routine. However, business owners who have been able to sell on their own terms gain a newfound freedom and a great sense of accomplishment – as they should.
By the time the training and transition period ends, the sense of loss is replaced by a real sense of unencumbered freedom. In the months, weeks, and days leading up to the sale, the seller will typically have begun a mental list of all they will do once free from the daily responsibilities of operating the business. What do they do with all of this time on their hands? Virtually all of my clients have told me how quickly they find plenty to occupy their day and embrace the freedom that comes with their exit.
KEY TAKEAWAYS
- Effective post-closing transitions require a well-documented plan that considers both the seller’s and buyer’s responsibilities and expectations, focusing on a smooth and structured handover process.
- Training and transition periods should be respected and utilized wisely, with both the seller imparting their knowledge and the buyer actively engaging and taking charge of the new responsibilities.
- Post-closing challenges are inevitable but can be significantly reduced through proactive planning, understanding roles, and maintaining a good relationship built during the sale process.
- Both seller and buyer must remember the legal and ethical obligations tied to the training and transition agreement, ensuring a commitment to the success of the business and each other’s goals.
FINAL THOUGHTS
Remember that the manner in which you are managing your business for the long term is far different than how you must manage your business in the two or three years leading up to the sale. The extent to which you take a critical eye to your preparation during this period will have an impact on the outcome and final sale price. Just as no two businesses are entirely alike, the factors which impact a sale will vary depending on your business. Below I have added a few thoughts not elsewhere mentioned.
Two Businesses Under One Operating Entity
If you have been operating what amounts to two separate businesses but filing a single tax return you need to take action early and well before entering the sales process. For example, we recently had a business owner who operated both a sod farm and a commercial landscape supply business with a single Profit and Loss, Balance Sheet, and tax return. While you cannot easily turn back the hands of time to accurately reflect two independent business operations you must address this situation as soon as possible. Here’s how: review the past two or three years’ Profit and Loss statements and for each year create a detailed Profit and Loss for each operating unit (business) with income and expenses clearly and fully documented for each. There must not be any overlap or duplication of income or expense. The income and expenses of the two Profit and Loss statements must add up to the totals found on the tax return, not closely, to the dollar. You must then have your accountant sign-off on each Profit and Loss to attest to the fact that they are true and correct as presented by you. Unless you are reading this on December 31st it is likely that you are currently using a single Profit and Loss for the combined operations. This is the time to begin documenting the income and expenses for each operation on their own Profit and Loss and Balance Sheet and to file a tax return for each entity. This will require establishing a new Tax Identification Number (TIN) for one of the entities. Unless you take these actions, it is highly unlikely that a lender will participate in the sale transaction and also unlikely that a buyer will have full confidence in the accuracy of the business you are presenting. Lenders do not like ambiguity and because the seller rarely has a direct conversation with the buyer’s lender the statements must stand alone for interpretation. Clarity for the lender is paramount with little left for interpretation. Be aware that even with these steps, some lenders will be hesitant to finance the transaction, so be sure to have your broker find a lender that will, or seek the advice of an SBA broker who will find a willing lender. We were very fortunate to have the guidance of one of the country’s most knowledgeable and experienced SBA brokers. Without them it is unlikely we would have had a successful outcome. Leaving this up solely to the buyer, especially a first-time buyer, is more than likely to delay or kill your sale.
Personal Expenses
If you are running personal expenses through the business in order to minimize your tax liability, and your plan is to sell within the next two years, I suggest that you stop doing so. In establishing the range of value as a multiple of SDE, business brokers are permitted to add back those expenses that your tax preparer allows under the current tax laws. However, lenders will dismiss many personal expenses in their decision-making process. Having a clear understanding of the most likely selling price range as well as confidence that the lender will agree with the valuation will help eliminate surprises. The easier you make it for the lender the easier you make it on yourself. Always remember that it is not just the buyer who needs to agree to the valuation, it is the lender that will make the final decision not only based on your documentation but also the results of the third-party Business Appraisal which the lender uses in their final approval. The dollar you may save in taxes today may cost you multiple dollars in sale value at the closing table.
Strategic Investments in the Business – Will You Reap the Benefit?
From both a business owner and business broker perspective I highly recommend that you take a hard look at both your expenses as well as any investments you are making in areas for long term growth. I had a client who was intent on building an internal sales team to focus on national account sales. Two years and $175,000 into this initiative it had failed to produce any significant returns and yet they were still throwing money into it. When asked when they expected to see business from this effort they told me it was still a couple of years out. When asked about their exit timeline they said “in the next 12 months”! If your timeline for an exit is less than 3 years from today and you are investing for something that will most likely not pay off until after you sell you are not only wasting precious dollars today and in the period leading up to the sale but each of those dollars may equate to 2, 3, or even 5 dollars in sale value (SDE times the Multiple).
Learning From the Mistakes of Others
The mistakes I have made along the way, especially in the early years of my entrepreneurial journey, are many. At the time they did not seem to be missteps or mistakes; they were unfounded concerns about letting my vulnerabilities show, my ego, or simply ignorance.
- Get to know your competition. I was afraid of cozying up to my competitors for fear of showing my ignorance or giving away my secret sauce. This mistake cost me months of knowledge I could have picked up and applied to my business. It’s a funny thing – competitors will tend to share their experiences and expertise. It’s good to get to know them while leaving your ego at the door. You will be smarter sooner, able to make sound decisions more quickly, and accelerate the performance of your business.
- Join and participate in your industry association. It’s a surefire way to build your knowledge and your business.
- Find a mentor within your industry and share your challenges. It’s a lot less lonely when you have an ally at your side who has faced and addressed the same issues.
- Hire a coach. I never did for various bad reasons, mostly because I thought I was pretty smart and did not need help. Every professional athlete has a coach, even Tiger Woods. We all have blind spots and need a proverbial kick in the ass once in a while. If the greatest golfer to step on a course values a coach, so should you.
- Join a Peer Advisory Group. While your business may have a degree of uniqueness, all businesses have the same elements: revenues, expenses, profits, customers, suppliers, and employees. Business owners all wrestle with the same issues and decisions. A Peer Advisory Group with its years of collective experience will provide insight, knowledge, and the confidence to address challenges and grow your business.
- Make decisions. Every day, you will make decisions, and when faced with an especially tough or complex decision, many people will put it aside or push it far into the future. Failing to make a decision is a decision in itself. Gather the facts, seek counsel, make the best decision possible with the facts at hand, and move forward.
Evaluating Business Brokers
When evaluating brokers, note their questions and whether they genuinely listen to your answers. The details always matter, and the number and depth of the questions from the broker are a telling indicator of how thorough they will be with vetting and educating prospective buyers and how they will manage the sales process.
Generally speaking, while it is nice to like your broker, it is far more important to gauge their experience, skills, and commitment to process. You want them to ask you tough questions and to respectfully challenge your responses – this is how they will vet prospective buyers.
With a significant sale (and yours is!), there’s no room for sugar-coated truths or being told what you want to hear. If a broker is buttering you up instead of giving you the straight facts, show them the door. Top-tier brokers will always be straightforward. They’re the ones who’ll point out if your zipper is undone – metaphorically speaking, of course.
Just as in any industry, there are experienced pros, soon to be pros, and the mediocre. Make the time to meet more than one, and give them your undivided attention when you meet with them. Failing to respect their time is a surefire way to be removed from their list of who they will work with.
I’ve mentioned ‘process’ repeatedly throughout this book. If you fail to be engaged and serious about the importance of the sale process, a great broker will quickly recognize it, and quite frankly, if you don’t show that you care enough to be serious about the sale of your business, why should the broker?
EPILOGUE
You would not be reading this book unless you were a business owner who has already achieved success, if for no other reason than having the courage to reach for the stars and believe in yourself while others sat idly by. Your ambition and perseverance are commendable, and now, these have brought you to the threshold of another significant achievement – understanding the art of selling your business.
You should now have a basic but solid understanding of the business sale process. With the guidance of a successful, experienced, and highly competent business broker, a lucrative exit on your terms will likely be within reach. This knowledge is a transformative power that can reshape your future and the legacy of your business.
However, I must add a note of caution. Few things are sadder than the business owner who worked a lifetime with the goal of living a comfortable retirement and found at the end of that journey that they had accepted the advice they wanted to hear rather than the objective advice they needed to hear. You absolutely cannot turn back the hands of time when preparing to sell your business, but you can assure a successful outcome if you make the time to learn and embrace the guidance that a business broker specializing in the preparation and sale of businesses offers.
If the information presented in this book resonates and excites you, I urge you to take the following steps:
- Commitment: Make a commitment to yourself to engage a business broker to understand the value of your business today and what you need to do to prepare for a sale, regardless of how far into the future that may be.
- Planning: Accept that you will eventually exit your business. Make time to understand what drives a successful exit and begin to implement the actions which will support a fruitful exit. These actions will very likely improve the performance of your business along the way. This is really an opportunity to have your cake and eat it too.
- Seek Authoritative Counsel: Don’t blindly accept advice from those not actively selling businesses daily. You will be confronted with anecdotes and misinformation from far too many sources. Seek authoritative counsel.
- Choose Wisely: Choose a broker carefully, and don’t be shy about hearing what you would prefer not to hear. Objectivity, competency, experience, honesty, and emotional professionalism are the hallmarks of the broker that you want to work with.
As you embark on these steps, remember that transformation is an ongoing process. A business owner who commits themselves to preparing early for their eventual exit will reap the benefits of a high-performing business with significantly greater profits and enjoy more free time knowing that their business can operate successfully in their absence. Let me say this again: Preparing your business for sale now will increase your profits in the near term and increase the sale value at exit. The vast majority of owners assume that the preparation process is costly and complex – it is neither.
For those who wish to discuss the Lucrative Exit Process or seek personalized guidance, I am always here to help. Feel free to contact me directly or reach out to one or more business brokers credentialed by the International Business Brokers Association (www.ibba.org). One hallmark of my success has been making the time to help others – a call or email will always be responded to.