When transitioning ownership of your business, it is common to focus on a single question: What is my business worth? While we are proponents of every dealer receiving a detailed, objective valuation, it is also important to consider non-financial factors that can impact the sale price and the interest of potential buyers.
In our experience, a business transition can fail, a buyer can back out of the deal, or the offered price can be lower than expected due to concerns about qualitative aspects of the business. These issues can raise red flags for a potential buyer, who may be concerned by the need to invest additional time and money into the business to ensure the transaction is successful.
Based on our years of experience facilitating family- owned business transitions, we have developed a list of best practices for strengthening the non-financial aspects of your business as you prepare for an ownership transition. These tips will help you prepare your operations and strategy to ensure a smooth ownership transition and maximize your business’ value.
LBM Resources
Leadership Development
For a business transition to be successful and sustainable, it is crucial to build a strong leadership team capable of guiding the company for 5-10 years after the transition. To assess your readiness, consider these two questions about your leadership team:
1. What is the average age of your senior managers?
2. Do you have a leadership development program in place?
In many family-owned businesses, senior managers are often around the same age as the owner and might plan to retire during or shortly after the transition. If you do not have a strategy to recruit and train future leaders, even a business with high profit margins may struggle to attract buyers. Addressing this issue is essential to ensure a smooth ownership transition that benefits all stakeholders.
Decision Making
Many business owners we speak with are highly capable and deeply involved in their company’s daily operations. They often manage key customer relationships, oversee purchasing decisions, and handle interactions with external vendors. However, for a successful transition, the owner must gradually shift control of decision-making to trusted managers to ensure the business’s success does not depend on just one person or a small group of people.
To facilitate a smooth transfer of decision-marking, we suggest clearly defining the decision-making process by specifying:
1. Who will lead each decision?
2. Who has the authority to approve each decision?
3. Who can contribute to the decision-making process?
4. Who needs to be informed about each decision?
By establishing this structure, you empower your managers and employees, which helps them engage more effectively and contributes to delivering the best value to your customers.
Business Continuity
As a business owner, you juggle many roles and responsibilities that affect your stakeholders’ lives and livelihoods. However, many owners lack a formal plan for how the business would operate if they or a key employee were to die or become incapacitated. While owners may have thought about these contingencies, the information is likely in their head and will be no use to the company, employees, or customers in the event of the owner’s death or incapacitation.
Therefore, we encourage all dealer owners to think about the following questions:
1. What are your daily, weekly, and monthly responsibilities?
2. Who would handle these responsibilities in your absence?
3. What responsibilities, if any, would your family need to handle in your absence?
4. Who are your external vendors and advisors, and who should be able to contact them?
5. Where are passwords stored and who has access to them?
6. When did you last update your personal estate documents, and do they align with your business continuity plans?
Addressing these questions will help you create a comprehensive plan to keep your business running smoothly, even in your absence.
The ultimate goals of a succession plan are to ensure a smooth transition where the owner can enjoy a comfortable retirement and create intergenerational wealth, the business continues to be successful and continues to support the community, and customers continue to receive excellent service. To achieve this, it is imperative to proactively address various qualitative factors before finalizing the sale. Partnering with an objective valuation and succession planning advisor who understands the LBM industry will help protect and grow your family’s wealth and leave a lasting legacy in your community.
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