By Maurie Cashman
Recognizing your prime is key to the timing of ownership transition of your business. This issue has been on the minds of several of my clients last week. This decision can be very difficult, emotional and ambiguous. Many owners think they are confused by the issue but I think it is a sign of strength and clarity that they are asking this question.
Much like my article about Non-Compete Agreements last week, there is no simple, one size fits all answer for this question. However, the fact that you are asking the question puts you far ahead of most business owners. The trick in my mind is to recognize when you are hitting the limits of your capabilities and to be prepared at that time to begin moving the business to your successor, who should have the capability to carry the business to its next level of success.
â€œBe on the alert to recognize your prime at whatever time of your life it may occur.”
–Muriel Spark, Scottish novelist
Here are a couple of examples. First letâ€™s talk about Jim and Monica. They started their business twenty years ago from scratch. They began in one niche of their industry and transitioned over time to the point where the majority of their revenues are coming from a related niche. They have made mistakes and also very canny decisions and as a result they have today a thriving business that is nearly debt free and also have investments outside of their business that will set them up nicely in retirement.
This business is tough. There is a lot of competition and the competition is getting stronger. It requires a lot of long hours and the business-specific risk is high as it is currently structured. Jim and Monica have been talking for a couple of years now about being tired of these issues. However, this business is their baby, they are emotionally attached to it and they donâ€™t know what they will do when they leave it.
I am beginning to position some options wherein they could re-position their business over a few years back toward the original industry niche. This is a difficult thing to discuss when the current business is doing well but I feel that the future is much stronger and will be worth over three times what it is today in five years if they successfully go back to their roots. However, that is going to require a tremendous amount of work, both physically and mentally.
So the questions that must be answered are:
- Have Jim and Monica taken this business as far as they can?
- Are they willing to do the work and take the risk to take it to the next level?
- Do they need to do the work to take it to the next level?
- If this is their peak, should they begin a transition to new ownership?
There are not likely to be crystal clear answers to these questions. After a lot of discussion, analysis and good old-fashioned soul searching we will decide on a course of action. However, there is a key piece of this discussion that is missing: this course of action does not have to be irreversible. While we may begin planning and even executing a plan to transition ownership, we can still stop and go in a different direction.
For example, perhaps we will begin to sell stock to a key employee with the idea that she is going to take over the business by using her distributions from the stock she owns to buy more stock until she has enough equity, and experience to buy out the remainder of the business. In the meantime, Jim and Monica retain control of the business and can decide to sell to a third part if a strong offer comes along, can buy back the key employees shares and then fair market value, bring in other key employees as owners or a host of other options.
The key is twofold. First, get a plan in place and begin executing it. Second, keep all options possible clearly on the table. Get your plan in place now so that you can control the outcome, rather than having events dictate an outcome you do not want.
Jim and Monica have made that decision and are in control! They have recognized their prime. Now the journey begins!