Thom Penmaen is 65 years old and under pressure from his family to retire. However, Thom has a great vision for the future of his tool and die business and there are many things he still wants to accomplish. He is certainly not ready to plan his exit!
Thom's position is one all veteran entrepreneurs can relate to – so much to do but so little time left. The last thing on their minds is exiting the business before they are good and ready. How and when to transition their business is undoubtedly a choice every business owner should have.
What Thom doesn't realize is that, by not planning ahead, he is actually reducing the likelihood that he will have that choice. At the same time, he is diminishing the chances of realizing his vision for the business. If Thom truly wants to achieve his vision, he needs to consider what's required to ensure his goals can still be met even if he is not physically able to lead the charge.
One day Thom will sell – either voluntarily at a time that is right for him, or involuntarily when death, ill health, reduced profitability or other external factors drive his decision. Whether or not any money changes hands, he has to choose one or the other. Thom needs to be proactive in ensuring he has the choice to sell voluntarily.
He then has to decide the “whom” – who will he sell to. Again, he only has two choices. He can sell to someone inside the family or business (an internal sale), or to someone outside the family or business (an external sale). Again, there are steps Thom should take ahead of time to give him maximum choice in selecting the right buyer.
Just like any other project Thom has managed during his 40-plus years as the owner/manager of Penmaenship Tool and Die, enabling a choice around when to sell and to whom needs a concrete plan of action and regular monitoring.
The good news is that planning for an internal sale also enables the choice to sell externally. For example, preparing for an internal sale involves building a management team that can carry the torch beyond Thom's tenure. So while Thom is grooming a prospective successor for a possible internal sale, he is also enhancing one of the key drivers for a viable external sale. At the same time he is ensuring he can have more control over the timing of an external sale and can avoid selling during a buyer's market.
Preparing for a Voluntary Sale
When it comes to preparing for your inevitable sale, the ultimate objective is to build a system that eventually sees the day-to-day decision-making pass from you to one or more persons within your business. The approach is to create a management group that could successfully carry the business should something happen to you. Building this system takes years and is likely the most critical part of the overall process to enabling an internal sale.
Essentially you should begin by imagining yourself out of the picture. How would the business function? What needs to be done to ensure it can function? How long will that take? What are the priorities? We refer to this process as “professionalizing the business” and it incorporates the following steps:
- First, spend some time with your BDO advisor to identify what's most important to you with regard to the future direction of your business.
- We can then help you share that vision with key members of your family and management team to define a group focus or common interest in moving forward.
- We recommend you involve this group in developing a concrete plan to achieve your common interest.
- It is important to determine the capabilities needed to implement this plan and then take inventory of the strengths currently in-house. We can guide you through this and help you develop a plan to fill in any gaps.
- The next step is to look closely at your own role and identify the areas that do not utilize your core strengths. Match these functions to people who would get more energy from working in that area. This is the beginning of the process to ensuring the business can function well without you.
- Assign the authority and accountability to go along with each of the responsibilities awarded.
- Create a mentoring plan to increase the skill sets and confidence of the management team and groom prospective successors.
- Check how the system is running without you by taking increasingly longer vacations. If you are reluctant to take an extended vacation, chances are the business is not yet ready for sale.
It is important to recognize that this management transition is a long-term objective rather than a short-term goal. It is a long-term process that creates an investment that is attractive to buyers from both inside and outside the business – prospective buyers can see how the business can continue to thrive without you.
Remember, this preparation doesn't mean that either you or Thom are necessarily going to sell any time soon – only that your businesses are ready for sale when the time is right.
For more information on how to proceed, contact your BDO advisor or our Business Transition Services team at 1.800.598.6400.