The small business 3-5 year transition plan

After years of hard work and dedication, you’ll inevitably get to the point where you choose to transition your business. Though it can be challenging to let the business go, it should be viewed as a mark of success. You've grown your business to the point where you can take move onto the next chapter. This is a huge accomplishment!

Even if it will be a few years before you move forward, it’s in your best interest to start planning sooner than later. Following are the key considerations when putting together your succession plan:

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Set your goals.

Before you can put your plan in motion, you’ll want to outline what you want to achieve and when. Ideally, you should start planning three-five years before you want to transition or sell your business. Preparing in advance has the added benefit to position you to respond to an opportunistic situation, like and unsolicited offer. 

As you think it through consider:

  • Exit timeline: Having a goal post allows you to create milestones for when you might need to take steps toward selling or transitioning. Keep in mind you can always adjust your time frame.

  • Exit strategy: How will you exit your business? Will you simply close up shop? Pass your business on to a family member or employee? Sell all or part of the company? Stay on part time and let someone else lead? Decide on your ideal plan, but also identify alternate options.

  • Retirement age: For many business owners, their personal retirement is a common scenario to transition a business. If you’re nearing retirement or even if you’re far from it, don’t expect to wait until the time comes to put the business up for sale and walk away without a glitch.

“You want enough time to reduce or eliminate risks that might reduce the value of the business,” says  Tom Smith, senior vice president and managing director of Business Owner Advisory Services from U.S. Bank Wealth Management. “A major risk for the buyer is the imminent departure of a business owner who is still the key employee of the firm.” That situation could negatively impact the company’s value in the market.

Smith recommends that in most cases where the sale is tied to retirement, the owner plans to remain with the business for some time to help the new owners make a smooth transition. “Buyers may be more attracted if the previous owner agrees to remain actively involved for two-to-three years to help facilitate a smooth transition,” he says. An alternative is to have a qualified replacement designated before new ownership takes control.


Know what your business is worth.

You know the saying, know your worth? It applies in business too. You’ve poured your heart and soul into your business but your passion isn’t enough to determine what your business is worth in dollars.

  • Assess the market and identify prospective buyers : The sale process can take anywhere between six months and two years, according to SCORE, a nonprofit association for entrepreneurs. Work back from your exit date and start coordinating early. Even if you don’t plan to sell, knowing the value of your company, as well as other major players in the marketplace, can help.

  • Be mindful of your business’s total value : It’s easy to get lost in growth targets or short-term earnings, but if you want to sell your business at some point, it’s important to think long term and look at overall value. In addition to the financial performance of the business, consider equipment upgrades, property renovations and net assets as well as liquidity and debt.

  • Track your industry: The value of your business can vary based on shifts in the overall market or within your particular industry. If your sector is experiencing a boom and business is steady, you might consider exiting sooner, or vice versa. This is when having target numbers in mind can help you evaluate your choices.


Work with a transition team.

A lot of financial and legal details go into transitioning a business, not to mention emotions! Because of this, you’ll want to work with experts who will ensure you cross all the t’s, dot all the i’s and can help you get the most out of the transition.That team typically includes tax, legal, accounting and wealth management advisors.

A business owner advisory team can help you evaluate options and choose the one that’s right for you. They can help you:

  • Understand your goals and objectives
  • Assess the value of your business
  • Explore your business transition options.


Identify your buyer(s).

Deciding whether you want to sell or transition your business will guide your succession planning efforts. Here are the options and what to consider for each path.

Selling your business on the open market

When thinking about selling on the open market, consider what you’d like to accomplish from the sale. Owners who want to maximize the value for their business are likely headed toward a competitive auction to find a buyer who offers the best price and terms. In that instance, the universe of potential buyers may be quite broad.But if you have certain criteria, such as finding a buyer who will keep the business functioning so employees can keep their jobs, then the pool of prospects gets narrower. The focus turns to finding a good cultural fit.

Typically, indications of interest from potential buyers are solicited and initial bids are provided. These tend to be ballpark estimates that don’t necessarily resemble the final agreed-upon sales price. After you determine which offer looks most appealing, the next step is to obtain a letter of intent. “While generally not legally binding,” says Smith “the parties are agreeing on a roadmap to a definitive, binding agreement.” Even at this point, there may be another four months or more left in the process, assuming all goes well.

Some potential buyers may want to dig more deeply into the company’s financial and legal records and even go so far as to talk to some of the company’s customers. Buyers often have an accounting firm conduct a “quality of earnings” analysis to verify that the numbers being reported are accurate. After all of this is completed, final negotiations can get underway.

Selling your business to partners or employees

In some cases, the potential buyers of your in the business may come from the inside. If there are partners in the ownership, one partner seeking to sell may try to come to an agreement with other partners in executing a sale.

“The big question when selling to a partner is to what extent the partners are on the same page,” says Smith. He has seen situations where partners who mostly agree on how to operate a business have significant differences when it comes to terms of a sale. Good communication that leads to alignment on priorities is important to help facilitate a smooth transition.

Some business owners want to create an opportunity for employee ownership of the firm as part of their business exit strategy. One alternative is an Employee Stock Option (ESOP), which is a trust and is incorporated into a retirement plan for an organization. It offers tax advantages for the seller and for the ESOP as ultimate owner of the company.

Employees who participate in an ESOP will be vested in the plan after a specific number of years, which encourages them to remain with the business over the long run. A business loan can be a great vehicle for a partner to buy your business, too.

The time it takes to sell your business can be significant. Preparing the business for a sale can take a year or longer. The sale process itself can take up to another six months or more.

Keeping it in the family

Some business owners wish to pass down their business to their children, other family members or even gift it to employees who will continue their legacy. This option typically is considered if the recipient plays a key role in the business. You’ll need to decide if any money will change hands or if you will pass the business and all of its assets to your successor. Both situations can have financial implications for both you and the individual or individuals taking over your business.

If you plan to transition your business to a younger generation, the key is to start the process early – ideally several years before you plan to step back from your business. This will allow you to identify the best potential successors and prepare them for their new roles. Here are the key considerations in preparing your succession plan:

Identify successors: Look for family members or employees who have the skills, experience, and motivation to take over the business. Consider their strengths, weaknesses, and interests, and involve them in the decision-making process. 

Develop a plan: Create a detailed plan that outlines the steps you'll take to transition the business. This plan should include a timeline, financial projections, and contingency plans for unexpected events. If you foresee a need for funds, business lending could be an option to consider. 

Communicate openly: Communication is critical during a business transition. Be honest with your potential successors about your expectations and plans and encourage them to share their concerns and ideas. Keep all stakeholders, including employees and customers, informed about the transition.  Consider when to involve certain parties in your financial considerations. Introduce them to your banker so you can have a transition conversation. Also, lending can be a helpful vehicle if money will change hands. 

Train and mentor your successors: Provide your successors with the training and mentoring they need to succeed in their roles. This may include on-the-job training, formal education, or mentoring from outside experts. 

Develop a transition team: Create a team of advisors, including lawyers, accountants, and financial advisors, to help you with the transition process.

Walking away

There’s a song about knowing when to walk away. Maybe this resonates with you. Just because you’re ready to hang up your hat doesn’t mean you have to transition your business to someone else. You can simply turn out the lights and close the door. Well, there’s a bit more to it than that. Here’s what you need to think about:

  • Real estate: Do you own real estate? If so, you’ll need a plan for selling it. It can take time to sell commercial property, so it’s a good idea to get ahead of it. If you rent, review your lease to make sure you meet your contractual obligations.

  • Business asset: From inventory to store fixtures, you’ll want to make a plan for liquidating assets.

  • Legal stuff: If you’re required to file business tax returns, you will need to notify the proper authorities that your business has closed.

Keep up your financial records.

While this is a must for any business, having excellent books including historical performance, expenses, revenue projections and cash flow is even more important if you’re planning to hand your business off to someone else.

It’s important to have accurate and up-to-date financial data ready to show potential buyers as part of your business exit strategy. It might take one to two months to pull together all the information they expect to see. It includes:

  • Up to three years of historical financial performance, including monthly information for the past two years, plus year-to-date numbers for the current year to give buyers a sense of performance and trends

  • Descriptive information about your company, its customer base and its strength and weaknesses

  • Organizational charts and identification of key employees

  • Insights into the competitive landscape in which the company operates

If your business has one, the support of a strong controller or chief financial officer can be instrumental at a time like this. Smith also recommends an outside, independent accounting firm review the numbers to validate the information you’re providing to potential buyers.


Create a contingency plan.

As we all know, things don’t always go according to plan. Sometimes a sale falls through or a medical situation emerges. When creating your succession plan, be sure to have a Plan B, Plan C and maybe even a Plan D.

The irony of selling your business is that when it occurs, often later in your career, it will require a significant commitment of time and effort on your part. “It can be a full-time job on top of your already demanding work,” says Smith. Before you start, be sure of your own commitment to see the process through on your terms.

Also make certain you can devote time to the steps that are required to achieve your objectives in selling the business. It can be beneficial to work with an advisor who can help oversee the process, work on identifying and contacting potential buyers and help guide you through the various and often complicated steps.

It bears repeating that the sale process itself will likely take six months or more. Depending on the makeup of your business, it may require that you stay involved for a period of time before you fully separate yourself from service.

Key takeaways

  • It’s important to have an exit plan in place well in advance of the intended sale, as preparing for and the sale process can take two years or more.

  • Make sure to factor your desired retirement age into your exit strategy and keep your financial records up to date.

  • As part of your strategy, decide if you’ll be searching for potential buyers or selling to partners or employee.

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