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.
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.
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.
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:
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.
Additional areas that help to measure your direct involvement in the business include:
The answers to this relatively small sample set of questions can assist you in starting to think through your overall involvement in your business.
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.
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