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How To Communicate To Your Employees That You’re Selling Your Business

Employee Communication | Business Sales | Grow Your Value

When you decide to sell your business, don’t forget to facilitate open, transparent communication with your key employees. Read on to learn more.

Once you decide that it’s time to sell your business, you’ll be faced with many challenges. Perhaps of the toughest challenges you’ll face is deciding when and how to inform key employees about your decision.

Don’t worry; you’re not alone. Many owners are reluctant to tell their key employees that they are selling the business. Why? They fear that their top employees will run out the door searching for a new job if they hear that the business is for sale.

One client told me that his biggest concern about placing his business on the market was that his employees would find out. He and his wife were in their 80s and frail. The reality was that the employees were scared that he would not sell the business and it would be liquidated after his death.

Succession Planning Communication Tips

It’s critical that you inform your key employees of your intentions. They will likely sense that there is something is going on anyway; so rather than letting them fear the worse, consider a transparent communication style. After all, rumor and innuendo can make your employees leave faster than the truth. Four things you should do upfront:

  1. Articulate to your key employees why you are selling your business.
  2. Assure them that you will tell the buyer how important they are to the business.
  3. Properly incentivize them to stay. A popular incentive in these kinds of situations is a large retention bonus that is paid to the employee(s) after the deal is closed.
  4. Make sure that your key employees understand the importance of confidentiality, and that not all employees need to know that the business might be sold.

The reality is that the buyer of your business will need almost all your employees to keep the business running smoothly and to generate a profit. A few employees could lose their job if the buyer is larger and can manage some of the administration function from the home office. But once the dust settles, most employees are likely to be retained.

Once the paper work is signed and your business is sold, it is important that you rally your employees and get them excited about working for their new boss. Not only it is the right thing to do, most deals have earn-out clauses that pay a portion of the purchase price over time depending on how well the new owner does with the business. Having motivated and good employees in place will increase your chance of maximizing your earn-out on a deal.

If you’re embarking on the journey of selling your business and need some assistance in figuring out how to communicate to your employees, email Rea & Associates’ business valuation team.

By Tim McDaniel, CPA/ABV, ASA, CBA (Dublin office)

Need more help to get you on the right track? Check out these articles for more helpful insight.

How Do You Choose A Business Exit Strategy?

How Do You Create A Succession Plan?

What’s Your Exit Plan?

 

Transitioning Your Company to a New Leader

Company Leadership Transition | Succession Planning | Business Value

If you own your own business, there will come a time when you will have to start thinking about your succession plan. Who will take charge after you leave? Will they have the skills needed to keep the business afloat? What if there are hard feelings? These are just a few of the questions you will have to consider when the time comes to transition your company over to new leadership. Read on for more FAQ to help you along the way.

As you approach retirement age, it’s important to plan ahead for transitioning leadership of the company you’ve worked so hard to build — and you may have more options than you realize. Read on for answers to some common questions clients ask when it comes time to start thinking about transitioning your company’s leadership.

How far in advance should I begin my succession plan? You’ll want to begin your succession planning as far in advance of your retirement as possible. Three to five years is optimal. Your plan has a better chance of succeeding if it is formalized and put into a written document.

How do I determine if it’s a better choice to transition my company to someone internally or to sell it? A detailed analysis of exit strategy options can be provided by a specialist in your CPA firm. Succession planning involves very complex issues including family dynamics, personal finances, business planning, business valuation and estate taxes; therefore, outside counsel can be beneficial. There are different strategies and tax consequences involved in both options, so a detailed written review can reveal the best choice for both you and the company.

What steps must I take to ensure a smooth transition? First, you must make sure you’re ready to leave the business – financially and emotionally. Ask yourself if you are emotionally ready to let go and whether you are financially secure enough to retire? Second, create your exit strategy. Your exit strategy should be properly communicated to all those involved.

Internal Transitions

How do I decide which family member/employee is best suited to run the business? Look for a strong leader. Somebody with with maturity, decision-making ability, and passion for the business. You may have more than one family member or employee interested in leading your company after you are gone. You will have more success if you simply pick a single leader. Don’t try to spread out the responsibilities.

How do I avoid hard feelings when naming a successor? If you’re in the difficult situation of having to choose between children, take the time to sit everybody down and discuss the decision. Communication and compassion is key. You should have a process for selecting which one will become the leader, and you’ll want to hold one-on-one meetings with each family member before the decision is made to discuss the process. Once you make the selection, explain why and gather support from family members.

I want to leave the business to a family member, but I’m not sure he/she can handle it on his/her own – what options do I have? There are three options to ensure the new leader is prepared for the job. First, transfer power one year before you leave so that you can be there to guide the individual. Another option is to hire a temporary outside manager to oversee the new leader for a term of one to five years. Or, you can create a board of advisors to meet monthly to act as a sounding board for the new leader.

Once I retire, am I out for good? What if I want to check in to see how things are going? Ultimately, once you leave, the new owner has complete control. If it’s a family member, consider family dynamics. Do you have a strong enough relationship that the son or daughter feels comfortable with you checking in? If so, state your expectations ahead of time, so he/she knows your interest in remaining involved.

External Transitions

What steps should I take now to make my business more valuable once I’m ready to sell? If you know you want to sell your business upon retirement, start planning early for ways to make it more attractive to buyers – this includes increasing cash flow or decreasing risk. You can improve cash flow through proper expense management and growth of sales. Diversification of product lines, establishing a solid management team, and reducing dependence on a single, large client are ways to reduce risk for buyers.

Are there ways I can ensure my vision is carried on after I am gone? It is difficult to ensure that it will happen, that’s why it’s so important to carefully consider the selling process. Decide from the beginning what’s most important to you. Is it making the biggest profit you can from the sale? Is it making sure your employees are cared for? Whatever your answer, look for a buyer who has the same values. You don’t have to sell your business to the first interested buyer. Make sure the buyer you choose is the right person for you, for your employees and for your business.

What steps must I take to ensure a smooth transition externally? Stay on for three months to a year after the sale, which is negotiated in the purchase agreement. Some buyers may want you to stay involved when you’re gone, and others won’t, so it’s important to establish those ground rules before finalizing the sale.

Contingency Plans

An important part of your succession plan not to be overlooked is a contingency plan. What happens if you must leave the business for an extended period for issues such as hospitalization? Or, what happens in the instance of a sudden death? While these things are not enjoyable to consider, you must prepare for the day when you can no longer run your business.

For more information on developing a successful succession plan, contact the Rea & Associates’ business valuation team.

How To Be A Visionary Leader

Family Business | Succession Planning | Know & Grow

More than 90 percent of businesses in America are family-owned. Unfortunately, most of them don’t have a written succession plan. Without one, they may be forced to close their doors before the second generation steps up to lead. Read on to learn more about succession plans for your small business.

One measure of a great business leader is that their business continues to thrive long after they’ve gone.  In fact, visionary leaders are those who captain the ship today while making plans for someone else to take the helm tomorrow. A proactive succession planning strategy allows businesses to sail along with minimal interruptions, which ensures continued operations and low employee and client turnover.

Planning for Business Transition

Unfortunately, for many businesses, leadership transition isn’t as smooth as we might like it to be. It’s estimated that more than 90 percent of American businesses are family-owned and that the majority have no written or formal plan for ownership succession. Unfortunately, without a plan in place to help govern a leadership transition, many are doomed to fail  – evident by the fact that 40 percent of closely-held businesses fail to make it to the second generation and 90 percent fail to make it to the third generation.

A succession plan is more than just declaring your intention to, “Leave the business to John, Jr.”  Proper succession planning requires great skill in the areas of taxation, valuation, mergers & acquisition, family relations, evaluation of talent and a host of other items. Additionally, it requires the business owner to confront some personal or family issues, such as deciding whether a family member is really competent to run the business.

Even though succession planning should be a priority for all business owners, there appears to be no sense of urgency when it comes to proactively putting one in place. In fact, oftentimes the owner won’t think twice about the issue until they are faced with a pressing need to leave the business.  As with any scheme, a hastily sketched succession plan may lead to the business’s failure.

Succession Plan Options

Many business owners will put off succession planning because, at first glace, it can appear too tough to tackle. Even though there’s no one “right answer,” there are a number of good options. Owners have the following possibilities when it comes time to transfer their business interest. (These are listed in order of which usually produces the least amount of cash proceeds for the business owner.)

  1. Liquidation
  2. Gifting to Family members
  3. Selling to Employees or Family Members
  4. Selling to an Employee Stock Ownership Plan (ESOP)
  5. Selling to a financial buyer
  6. Selling to a strategic buyer

With all these options, it can be hard to determine the type of succession plan that’s right for your business. Luckily, this isn’t a decision that you have to make alone. Email the Know & Grow division of Rea & Associates to start developing your business succession plan today.

By Tim McDaniel, CPA/ABV, ASA, CBA (Dublin office)

Check out these articles to learn more about succession planning:

Succession Planning: A Must For Every Business Owner

When Should Your Start Thinking About Succession Planning?

Executing and Reassessing Your Plan

Is This The Right Time To Sell Your Business?

Business Sales | Valuations | Growing Value

Are you looking to sell your business? Then you may want to consider some of these important factors that can influence the price a buyer will pay.

Are you wondering if it is the right time to sell your business? Well, if you are looking to sell your business at a higher price, you need to understand the factors that usually drive the prices buyers are willing to pay.

Naturally, the best time to sell is when the anticipated cash flows are high and the perceived risk is low. Economic conditions, industry trends, buyer activity and a company’s overall performance and infrastructure all contribute to maximizing optimal timing. But, believe it or not, there are other factors at play that you can help control. Here are a few areas you can influence to help maximize the sale of your business as well as a few that, while you can’t influence them, you should get to know a little better.

Read Also: Don’t Leave The Future Of Your Business Up To Chance

Factors Within Your Control:

  1. Financial position of the company: If you have plans to retire in a few years, start planning the sell of your business today. That way, when your cash flow level is at its highest, you will be ready to move quickly to seize the opportunity. Additionally, reviewed or audited financial statements, great records and internal controls will lessen any buyer’s perceived risk which will make your business more desirable to a buyer whenever you decide to put your company on the market.
  2. Management depth: If your company’s success is dependent on one or two employees, buyers will view this as a risk – significantly reducing the price they are willing to pay. The best time to sell is when there is enough management depth to reduce the risk levels to the buyer.
  3. Customer or supplier Concentrations: Similar to the point above, if the majority of your revenue stems from only a few customers or if you exclusively work with one or two suppliers, the risk associated with your business increases. Usually, when more than 20 percent of the sales come from one customer, an earn-out arrangement is made based on the retention of the customer. This provision can be particularly hard if your end goal is to retire and move on from the business.
  4. Owner burn-out or illness: When a business owner is burnt out, they don’t pay attention to the little things. And, more often than not, these little things make a huge impact on the bottom line. If you are no longer feeling motivated to manage, it may be time to move on. I’ve found that planned retirement is the best reason for an owner to sell because it provides the buyer with a valid reason for why you are looking to sell – ensuring them that you aren’t looking to cut-and-run for some other reason.

Factors Outside Of Your Control

  1. National economy and business cycle: It’s best to sell a business when the economy is robust because the demand for products is naturally stronger. When the economy is weak, sales and profitability usually decrease, in turn making businesses less profitable. Since buyers put more weight on the last two or three years’ results, it is important to sell when the company has been most profitable for several years.
  2. Interest rates and credit availability: When interest rates are dropping, borrowing costs are lower and therefore a buyer can afford to pay more for a business. When credit policies are tight, the supply of buyers is significantly lower. This is an optimal time for a buyer with great credit to purchase a business.
  3. Tax implications: It is important to consider tax costs (payroll, income, estate, capital gains and personal property) when considering the sale of a business.
  4. Stock market influence: When the stock market is up, publicly traded companies can purchase other stocks at better prices, making acquisition easier. If a publicly traded company could buy your business, it would be best to sell when the company’s stock price is higher.
  5. Industry legislation: When deciding whether or not to sell a business, consider whether government regulations are likely to increase or decrease in the future. If it looks as though government regulations may restrict the industry in the future, selling now may be a good option.
  6. Labor costs: If labor costs look as though they might rise significantly in the future, it may be a good time to consider selling. When labor costs go up, profitability decreases along with the overall value of the business.
  7. Buyer activity: More buyers competing for your business tends to drive up the price. You should be well aware of the buying activity that is going on in your industry.

With so many things to consider, it is not possible for all of these factors to be in your favor at the same time. But by realizing how certain trends and situations can affect a business’s success, owners are able to make more sound decisions when it comes time to sell. Want to know if this is a particularly good time to put your business on the market? Email our Know & Grow valuation team to get the help you need today.

By Tim McDaniel, CPA/ABV, ASA, CBA (Dublin office)

Check out these articles for even more great insight for sellers:

Is Your Business Ready To Sell?

Ten Commandments Of Selling A Privately Held Business

How To Communicate To Your Employees That You’re Selling Your Business

 

Don’t Leave The Future Of Your Business Up To Chance

Know Your Enemy

There are a myriad of factors that can influence the value of your business. And unless you want to leave the future value of your company up to chance, the last thing you want to do is to wait until the last minute to have your formal business valuation completed.

You know the expression: “know your enemy.” Well, once you have a clear idea of what it is you want to accomplish with your business and what “enemies” are likely to stand in your way, you can develop a plan to overcome those obstacles and come out on top. Start by taking a look at the following eight factors that can influence your business’s value.

Common factors can impact the value of your business 

  1. The industry within which your company operates
  2. The size of your business
  3. The timing of the deal between buyer and seller
  4. The terms of the transaction between buyer and seller
  5. The current business owner’s financial records
  6. Discount for lack of control – if a minority shareholder is in the picture
  7. Discount for lack of marketability – if a company’s stakes can’t quickly be converted to cash
  8. Whether or not the sale is being transferred to a family member

Current events have made the last factor outlined in the above list particularly important.

Recently, the IRS took steps to eliminate some traditional discounts some business owners relied on to transfer their closely-held businesses to family members. Under the proposed rules, business transfers that would occur between family members could be taxed at a much higher rate than those occurring between non-family members.

Read more about this topic on the Forbes website. The article, “Exiting Your Business? These Factors Can Affect The Selling Price,” dives into current concerns business owners are facing when planning for their futures and features insight from Mary Beth Koester, a manager on Rea’s business valuation team.

If you have questions about the various factors preventing you from realizing your company’s maximum value or are wondering how the current IRS proposal could impact your future plans, reach out to the business valuation team at Rea & Associates.

By Tim McDaniel CPA/ABV, ASA, CBA (Dublin office)

Check out this article series for more great insight

Are you planning to transition your business to a family member when it’s time to retire? Then make it a point to read the Six Steps For Successfully Transitioning Your Family Business for behind-the-scenes insight that will point you in the right direction.

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Rea & Associates Inc. | 5775 Perimeter Drive, Suite 200, Dublin, Ohio 43017-3224
phone 614-889-8725 | fax 614-889-0159