Endgame Strategy: Preparing Your Business for Succession or Sale
Second Quarter 2025 | CSCNetwork News | Albert J. Bart and Lindsay B. Dial
Running a business is no easy feat. As an owner, you’re constantly balancing the demands of daily operating life - managing employees, handling customer concerns, overseeing finances, and navigating supply chains. With so much on your plate, the idea of strategy and planning for an eventual exit may seem inconceivable. However, preparing for the future of your business is just as important as managing the present. Taking specific, intentional steps now – like those described below –can put you in control later, and planning ahead can provide the confidence and peace of mind you need to keep the business thriving for years to come.
- Start Early: One of the most common mistakes business owners make is waiting too long to start preparing. Ideally, you should begin planning at least three to five years before a desired transition. Early planning allows you to:
Understand Your Market: Understanding your market is a critical step in determining the future direction of your business, particularly when weighing the choice between maintaining independence and selling to a national business. By carefully evaluating market trends, customer demands, and your long-term goals, you can make a more informed decision about which exit path best aligns with your vision for the future of your business.
Identify Potential Buyers: When deciding between transferring ownership of your business to a family member or trusted insider versus selling to an outsider, it’s important to consider both the emotional and practical implications. Passing the business on to a family member or someone within the company can offer a sense of continuity, preserving the legacy and values you’ve worked hard to establish. It also allows for a smooth transition, as the successor is already familiar with the business operations. This option, however, may come with challenges, such as family dynamics or the risk of insufficient management experience. On the other hand, selling to an outsider can bring in fresh perspectives, resources, and the possibility of growing the business to new heights.
Evaluate Timing: External factors like market conditions and economic cycles, together with internal factors like age and stage of life, can impact the timing of a transaction. Picking the right time to execute vs. having timing dictate to you when you have to execute can be a huge factor in the financial and strategic success of an exit. - Get Things in Order: Buyers and other potential successors will closely diligence your financial records and demand that the company have proper legal documentation in place. To ensure you are ready to survive this scrutiny:
Financials: Prepare, gather, and review financial statements for the past three years, including income statements, cash flow statements, balance sheets, and tax returns.
Contracts and Agreements: Review key contracts with suppliers, customers, and employees to ensure they are properly transferable with no negative impact on terms.
Business Structure: Ensure your business entity is structured to allow for a seamless transfer of ownership, including being up-to-date on corporate records and governance matters.
Tax Planning: Work with a financial advisor or tax expert to understand the tax implications of a sale or other transfer. Minimizing the tax liabilities of your chosen exit strategy will obviously increase the sale proceeds kept in your pocket.
Increase Profitability: Buyers are looking for healthy, profitable businesses. If your business isn’t showing consistent profits, consider taking steps to improve cash flow, pay down debt, and streamline operations to improve performance and maximize returns. - Build a Strong Management Team: Having a capable and trustworthy management team in place is crucial – buyers will want to know that the management team can run the business without you. To maximize the investment of your time and resources to achieve this, you should identify key leaders capable of leading the business in your absence and document their roles and responsibilities within the organization. You should also create or otherwise identify training and development programs for internal talent and provide mentoring for potential successors. This will not only prepare your team but also demonstrate to potential buyers that the company has depth and can continue without you.
- Assess Your Business’ Value: Understanding the true value of your business is critical in both the succession and sale processes. Consider hiring a professional business appraiser to:
Perform a Business Valuation: A valuation will give you an accurate idea of your business’ worth based on factors such as cash flow, market conditions, industry trends, and growth potential. A certified appraisal provides an accurate and unbiased assessment of your company’s market value, allowing you to set a realistic and credible selling price.
Identify Areas for Improvement: A thorough valuation will also reveal any weaknesses in the business that could negatively impact its value. Addressing these issues before the succession or sale can help you achieve a better outcome. - Engage Professional Advisors: Navigating a business succession or sale is complex, so it’s important to consult with professionals who specialize in these areas. A team of professional advisors can provide valuable insight and guidance associated with the exit process, including legal and financial considerations pre- and post-closing. Your advisory team will likely consist of a good corporate attorney, financial advisor, tax professional, and a business broker or investment banker.
- Plan for a Smooth Transition: Any transition should be managed carefully to ensure continuity. Steps to prepare for this include creating a transition plan that outlines the steps involved in a transition. This would include a plan to introduce the new owner/operator to your management team and employees and training for operational handoffs. You should also be prepared to offer a limited time of post-closing support (i.e., transitional services) to new leadership, balancing the value of your institutional knowledge and experience with the need to fully transfer power to the new team.
Conclusion
Whether you plan to hand over the reins to a family member or key employee or cash out to the highest bidder, careful preparation is the key to a successful succession or sale. Developing a thorough exit strategy and following a series of well-defined steps will ensure maximum value, minimize risk, and provide a smooth transition, all serving to preserve the legacy you worked so tirelessly to build.
