Top 4 Business Transition Fails and How to Prevent Them

The 2018 State of Owner Readiness - Georgia report by the Exit Planning Institute shows around 6 million privately held companies operate in the United States, representing $30 trillion in sales and $15 trillion in wealth.

This means the continuity of these businesses doesn’t only matter to the owners and their families, but also to their employees, vendors, customers, charities, and the surrounding communities.

Most of the reasons business transitions fail are based on inadequate preparation. This problem could be a result of unexpected circumstances, but the outcome is the same as if it were caused by a lack of preparedness. The four typical reasons why transitions fail are:

1. When owners decide to exit, they realize they have not allowed themselves enough time to position their businesses for transition, minimize taxes, or maximize net proceeds. Thus, they achieve significantly low net proceeds.

2. Business owners are often unprepared when an unplanned event affects them and forces them into an exit that is not on their terms or timeline. Alternatively, they may receive an unsolicited offer from a buyer. A lack of readiness prevents them from harvesting the value of their business in either of these situations.

3. Business owners are unable to complete a third-party sale of the business because the business fails to pass the due diligence test to complete the sale – even a partial sale – to a third party. Private equity and strategic buyers are seasoned and selective.

4. Owners may also be unaware that they have eliminated their inside options, including transitioning to a family member because their business:

Cannot operate without them,
Is potentially undercapitalized, or
Has insufficient cash flow to succeed with an inside option.

The solution to all these scenarios is to plan early for your transition. This will enable you to address potential problems, establish financial records that can stand up to scrutiny, and empower your business to operate without you. It will also help you improve growth and sustainability and provide a basis for an accurate business valuation.

Planning a Successful Transition

Exiting an established business successfully means having a smooth transition to new ownership and getting adequate compensation for the years of work you have put in. Also, it often involves negotiating job security for your employees for a minimum period.

For deals that include royalty payments or ongoing commissions, guaranteeing that your clients continue to get quality service is crucial to realizing the full value of the sale. With proper planning, however, you can prepare your company for transition and ensure a successful handover.

Making The Right Steps

To prevent these business-transition killers, take the following measures.

Develop a formal transition strategy well ahead of time. Call in a business valuator to find out what your business is really worth, and research the future of your product and industry. Determine how you can maximize profitability by lowering costs, improving efficiencies, and upselling your existing clients.
Create clear goals and objectives based on market research that takes account of future opportunities for growth. Calculate the company’s future financial potential based on existing records and market data. Assess the risks facing your business and plan time-sensitive actions to minimize them.
Identify the type of buyer who will meet your transition goals. You might know why you want to sell and what you hope to achieve, but it’s also necessary to establish who your successor might be. This will help you avoid wasting energy on the wrong prospect when the time comes.
Determine whether you have family members or management who might be interested in taking over, and if they have the funds to buy it. If not, would it benefit you to structure an installment sale to enable them to purchase the company?

Consider Your Future Role

Many business owners feel like they’ve put their life’s work into their company and aren’t ready to simply sell it and walk away. While there are options for staying involved in a business after the transition, you’ll need to have a clear idea of how much you want to remain active.

Whether your future plans include continued involvement with the company, or you’re planning to remove yourself as far away as possible, having a definite personal post-transition plan is important to enable you to make a good decision.

Setting Up for Success

Achieving a successful business transition that enables you to go on and live the life you want requires careful planning to ensure:

Your business is ready to transition to new ownership or management.
You get the best possible return on your investment of time and money over the years.
The company remains profitable to protect your reputation and future payments due to you.

Since research shows only 20 to 30 percent of business transitions succeed, there’s no time to lose if you’re likely to sell or exit in the next five years. The sooner you begin planning for your transition, the greater your chances are of avoiding failure.

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