October 12, 2020
The COVID crisis may give some business owners a reason to pause and consider the future of their business, especially if they have been thinking about transitioning their business to family, to a key employee, or to others outside of the business.
Because the baby boomer generation of business owners are facing retirement, many will be faced with decisions regarding business transition. In addition, there are certain trigger events that could occur in a closely held business with two or more owners that would cause angst if there were not a proper agreement in place to address those triggers.
Have you wondered how you would transfer ownership of your business when it is time to retire, or when you are forced to retire due to health reasons? Have you wondered how you would value the business in these cases? It may be time to review your business buyout agreement, commonly called the buy-sell agreement, to see how the “triggers” are addressed. Don’t have a buy-sell agreement in place? Then now is the time to consider putting one together by working with an attorney, CPA or financial advisor on drafting the proper agreements to cover the transition issues mentioned above. Keep in mind the best time to address transition issues is in the beginning when you are forming the business with your partners.
If you are the sole owner of a business, transitioning when it is time for you to exit also requires preparation. The business has to be prepared for sale so that it shows well, much like selling a house. Financials have to be in order and business processes and customer relationships have to be such that the business can run well and profitably without you being in place. If the business runs well only as long as you are at the helm, it may not be worth as much to someone else. If you are transitioning the business to an interested family member or key employee, then this process may be easier as they have time to work towards ownership, and you can help make the transition smooth. However, transitioning to an outsider when you wish to cash out and leave is a different story. Structuring the business where the sales, processes and relationships are not solely dependent on you as the owner is important and may take time to put into place.
Many business owners will be looking at transitioning their business in the near future due to retirement or health reasons, or will find themselves in a transition situation because of certain triggers occurring in the business. Preparation and planning are important to make it go as smooth as possible. In the case of a business transition, seek the appropriate professionals to help you.
“Business Tips” was written by Mr. Dave Erickson, Director and Certified Business Advisor, of Angelo State University’s Small Business Development Center. For more information on the topic of this article or the services of the ASU SBDC, contact him at David.Erickson@angelo.edu