Increasingly owners of business want to slowly transition from their business and not merely sell the company and walk away. This change in behavior has been partially attributed to the attitudes of the baby boomers, who want to work later in life than previous generations. This interest in having a business transition approach has been driven by recent economic considerations of the recent recession and the prospects of a slow growth economy for the immediate future.
But no matter what is motivating an owner to develop a business transition plan, having a written business transition plan is an important aspect of strategic planning for today’s small business owner.
There are several strategic approaches for today’s small business owner to generate cash from the business they have built, and be able to continue to work in their business:
- Build a strong management team that is able to take on more and more of the day to day activities that traditionally had been done by the small business owner.
For many small business this may be the best answer. This takes continued investment in growing your management team, but the stronger the team, the less that owner has to do to run the company. In this way, the owner keeps the company and transitions to an advisory and oversight role. If done properly, annual cash flow generated from the business can be added to the owner’s retirement assets. And then eventually the company can still be sold.
- Sell the company to another company that values the ongoing contribution that the current owner can make to the new company.
Many buyers in today’s market are asking the current owner to stay on for one or more years after the business transition. In some cases they want to retain the current owner to run the business on an ongoing basis after the business transition plan has been implemented.
- Sell part of the company to a private equity firm.
If the company has a good history of profitability and/or good reasons to project future profitability, they may be a candidate for what is usually referred to as a recapitalization. In this process a private equity firm purchases part of the company, usually a controlling interest. This generates immediate cash to the owner. Typically the private equity firm keeps the owner to run the company for an extended period. They usually only replace the owner if the company fails to continue to generate adequate profits for the investor.
- Slowly ramp down the revenues and expenses of the company over time.
This is the option of last resort for a business transition plan, but many small businesses don’t generate enough cash to interest most buyers or they are professional services firms that are highly dependent upon the owner’s expertise. If this is your choice make sure that this is planned for and that expenses are curtailed as revenues fall off. Even a company with less and less expenses can be kept profitable during the transition period, if properly managed.