Business owners who are thinking about the future will often wonder “who will own my business after me?” Owners who consider this issue need to ask a very important question in preparation for a future transition or sale: “Is my company transferable?” In order to answer this question, here are some things you should review to determine whether or not your company will thrive after the transition to new ownership.
Is your business “transferable”?
In order to begin thinking about what would make your business attractive to a new owner, you must first consider what it means to own and run a “transferable business.” A transferable business is one that can be owned and run by someone other than you and/or your partners today. Many privately-held business owners do not have a transferable business because their individual efforts and contributions are indispensable to the successful running of the company.
The first key is to measure and manage your level of involvement in the running of your business. While the formula to calculate your total involvement in your business is a bit complex, there are a few simple items that you can review to determine how involved you are in running your business. Let’s take a look at the risks posed by your company having a higher owner dependence.
How involved are you in your company’s operations?
When it comes time to transfer ownership of your business to someone else, your level of involvement in the company is going to become a major issue that needs to be discussed and navigated. The primary issue should be obvious — if your company cannot run effectively without you, then you should not expect that a buyer of your business will simply take over the company without your active involvement into the future.
Additionally, when owner dependency is high and the owner’s active involvement in the business is required for the business to operate, the riskiness of the business goes up and the overall value (including how and when an owner would get paid for the business transfer) tends to be reduced to account for this riskiness. In short, a high owner dependency makes for a difficult business to transfer.
How involved are you in the markets your company serves?
While there are likely many important tasks that you perform in your company, one of the most significant is your involvement in the marketplace that you serve. Typically, one of the most critical areas where owners provide leadership in their businesses is the creation, distribution, and delivery of the company’s products and services.
Some questions that an owner can ask themselves about how involved they are with their business include the following items:
- How involved are you in the creation of new products and services for your company?
- How involved are you in selling the products and services provided by your company?
- How involved are you in the process of your company’s delivery of its products and services?
If you are like most privately-held business owners, you have a high level of involvement in at least one, if not all three of these “market-facing” areas. Company founders are often the most knowledgeable of their company’s products and often struggle with the transfer of this knowledge to others in the business.
What else do you need to consider?
Additional areas that help to measure your direct involvement in the business include:
- Are key decisions at the company made primarily by you?
- Do you handle major accounts?
- Do you have written detailed systems and procedures for your business and a process to assure that they are followed?
- How often do you enter financial records into the system and/or run for office supplies?
- Do you have daily meetings with key managers to review objectives?
The answers to this relatively small sample set of questions can assist you in starting to think through your overall involvement in your business.
We’re here to help.
While most privately-held businesses are run by their founders, it is important when considering a future transfer of ownership of the business that you evaluate your company’s owner dependence. By taking stock of these important considerations, you’ll put yourself in a better position when the time comes to start thinking about transitioning your company to a new owner.
Hancock Whitney is ready to provide the advice you need to start, grow, and transition your business in order to achieve your financial goals and dreams. Let’s talk today.
© 2023 The International Exit Planning Association. Used by permission.
The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.
This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.
Hancock Whitney offers investment products, which may include asset management accounts, as part of its Wealth Management Services. Hancock Whitney Bank is a wholly owned subsidiary of Hancock Whitney Corporation.
Investment and Insurance Products:
NO BANK GUARANTEE │ NOT A DEPOSIT │ MAY LOSE VALUE │ NOT FDIC INSURED │ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
Equal Housing Lender. All loans and accounts subject to credit approval. Terms and conditions apply.