In last month’s article, we talked about the importance of planning ahead for a voluntary sale of your business and creating the choice for either an internal sale to family or management, or an external sale to a third party. We explained that if the business is set up for an internal sale, this also affords the opportunity to sell outside on your terms.
Enabling this choice involved creating a system that did not rely on your leadership for its success. The article outlined a number of the key steps in professionalizing the management of the business.
But there is more to preparing for a voluntary sale than developing new leadership. A successful sale is dependent upon transitioning all three major asset groups:
- The Physical Capital that represents the Ownership circle and is needed to fund the lifestyle and provide financial independence for exiting and incoming stakeholders.
- The Social Capital that overlays the Family/Personal circle to ensure the continuity of the firm’s reputation, culture and employee or team engagement.
- The Intellectual Capital that is at the core of the Business circle and includes the in-house competencies, wisdom, patents and business relationships – all of which are critical to the continued profitability of the enterprise.
To add to the steps previously provided for transitioning the intellectual assets and maintaining the wealth engine that your business represents, here are some guidelines for transitioning the social and physical assets.
The Physical Capital / Ownership Circle
The objectives in this area are to protect the existing and future equity of the business while creating a fair system for shareholders to enter and exit ownership. Your trusted advisors at BDO will go beyond the typical planning approach to help you identify your philosophy and principles, and then create a plan that meets your specific needs. The tactical steps to enabling an internal sale in the ownership area include:
- Creating an advisory board to support the philosophy of the business and add structure to the process of setting the long-term purpose and vision.
- Implementing a financial plan that will not only provide you with the choice around when to exit, but also facilitate your desired lifestyle during and after your exit.
- Establishing the value of the business and exploring the tactics that will provide creditor proofing while managing the tax liabilities of the eventual sale.
- Setting up an ownership structure that will not only afford you maximum choice in selecting the next shareholders but allow you some flexibility in treating your beneficiaries fairly.
- Formulating a rule book that documents the terms of ownership, a compensation policy, a dividend policy and the process for allowing shareholders to enter and exit the business.
With these policies in place, you will have formalized the ownership transition process ahead of time, thus making the sale more attractive to prospective buyers within the family or management group.
The Social Capital / Family and Personal Circle
Often the greatest challenge in preparing a business for an internal sale is dealing with the differences between family or personal values and best practices in the business. Family values generally focus on what’s best for the individuals and their relationships as opposed to what is best for the business. Yet family values are behind the motivation to keep the business in the family in the first place! Many business owners fear the negative aspects of the internal sale and avoid planning in this area. They are afraid that:
- Their choice of successor will cause conflict in the family. Treating their children equally is one of the cornerstones of being a parent so choosing one child over another is difficult in any situation.
- They will lose their identity and purpose when they are no longer recognized as the principal of the business. There is also the feeling that their exit might negatively impact the firm’s culture or the level of engagement among the employees.
- Handing the reins to a less experienced leader might result in a loss of the wealth they have spent so long creating.
So from the perspective of the family circle, the objective in preparing ahead for an internal sale is to build a sense of stewardship around the business. Stewardship is the idea of being the keeper of the assets as opposed to the owner. The steward’s role is to look after the golden goose for a period of time before passing the baton to the next in line. This approach fosters connectedness in the family unit and among the team, both of which are essential for a successful internal sale. Here are a number of strategies your trusted advisor might recommend:
- Share the history of the business so everyone can learn from the past and celebrate the journey.
- Communicate the founder’s vision of the business, the ongoing purpose of the business, and the principles upon which it stands.
- Help all family members, especially those that are not involved in the business day-to-day, to feel connected to the business and encourage the building of a family legacy. Be sure to engage all the in-laws so that the concept of connectedness can pass to the grandchildren.
- Promote existing or build new family traditions.
- Ensure there is a safe forum where family members can connect and discuss issues that impact the family.
- Enable individual family members to identify their personal passion and direction in life.
- Establish the process for family members to obtain ownership and/or be involved in the day-to-day operation of the business.
- Help the family learn how to make decisions together. Families can quickly break apart without the parental glue.
By actively promoting connectedness within the family, conflict becomes more positive and easier to manage.
When entrepreneurs embrace the concept of stewardship and actively walk the talk, the fear of letting go can be greatly minimized. Instead they are able to recognize that their exit serves to perpetuate the business and/or wealth, provides another role for them to play and strengthens their legacy.
So make it your priority to enable that voluntary sale to someone within your business and give yourself maximum choice around how and when you will exit. During the process you will develop a strong philosophy and culture that increases the goodwill of the business resulting in a more lucrative option for outside investors. Thus the opportunity for a successful sale to either an outsider or a family member is greatly enhanced.
For a personal consultation on preparing for the transition of your social, physical and intellectual capital, contact your personal BDO advisor or our Business Transition Services team at 1.800.598.6400.