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PITTSBURGH, May 16, 2023 /PRNewswire/ — Every owner will leave their business one day, but few are prepared.
In her new book, The Business Transition Handbook: How to Avoid Succession Pitfalls and Create Valuable Exit Options, author Laurie Barkman provides a step-by-step process to ensure every business owner is prepared for this transition.
“When you’re ready to sell, the company may not be sell-ready–leaving you out of time and unrewarded,” says Barkman. “Most entrepreneurs are too busy to begin thinking about the end. But they may be leaving money—and their happiness—on the table. It’s crucial to start thinking three to five years in advance who might buy your business.”
Barkman, the former CEO of a $100 million in annual revenue company that sold to a Fortune 50 firm, is a business transition sherpa. As a business exit planning advisor and host of the award-winning podcast Succession Stories, she provides guidance to business owners on how to plan successful transitions.
The Business Transition Handbook demystifies the exit process, guiding business owners who are considering leaving their ventures or beginning to think about their eventual next steps.
“My book prepares owners to navigate the emotional and practical nature of the transition process so they can exit on their terms and avoid succession regrets,” says Barkman, an adjunct professor of entrepreneurship at Carnegie Mellon University Tepper School of Business in Pittsburgh, PA.
Barkman’s book discusses the three most likely candidates as potential buyers:
Strategic Buyers: companies that aim to acquire businesses whose products or services can be integrated into their existing operations and create long-term value. These buyers can also be unrelated to the company for sale and looking to grow the market to diversify revenue sources. Strategic buyers can be a publicly traded or privately held company.
“In industries that are heavily regulated, or subject to unpredictability, seeking an alliance with a strategic buyer can offset potential hazards linked with the sector,” says Barkman.
To realize the forecasted results, strategic buyers can optimize the balance sheet, reduce interest expenses, remove redundant operating expenses and headcount, or increase top-line revenue through cross-selling. The key to having an acquisition that gradually grows over time is the ability to successfully integrate both companies.
Financial Buyers: include private equity firms, family offices, and acquisition entrepreneurs. Private equity groups (PEGs) describe investment partnerships that buy and manage companies before selling them. PEGs raise capital from limited partners and managing partners determine how to invest those funds. Private equity firms operate these investment funds on behalf of institutional and accredited investors. PEGs are in the business of making investments in core portfolio companies, or platform deals, and realizing a return within five to seven years with a subsequent sale or an initial public offering (IPO).
Family office investors are also considered financial buyers – having generational wealth or having sold real estate or businesses. Family office investors are somewhat like a PEG, but they are not investing third-party money from investors. They are investing money from the family. In contrast, these investments have a long-term approach and are often called patient capital.
Acquisition entrepreneurs are looking to acquire an existing company funded by a combination of personal funds, investor capital, seller financing, and bank financing. They seek to acquire the business to run directly as the operator or as part of a larger strategy to develop a holding company of smaller businesses.
Related Buyers: are related as family, management or a partner buying out the other partner.
“You may be surprised to learn that only a third of family business organizations have a robust, documented, and communicated succession plan in place,” says Barkman.
Selling to management may not be the highest price, but it should be a fair price. “If you have been developing your management team, and they are interested in ownership, this may be a succession option to consider,” says Barkman.
A management buyout (MBO) is when a company’s existing leadership team purchases a majority stake from the owner using outside debt. Another option is for the owner to grant shares to management over a long-term vesting schedule.
If you want to transition the leadership and ownership of your business to your management team or family members, take the time to work out a plan.
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