What is a successful transition?

Mike Quinlan | VECTAC Advisory Services | Certified Exit Planner
Brightworth Business Exit and Transitions (BETS) Team

As an aviator, I define a successful mission as safely arriving at my planned destination, on time and with happy passengers. Can you define success in selling your business? It is an important question. Statistics show only 20 – 30 percent of business owners are able to sell their business!1  Of those, 75% of sellers are unhappy within one year of the transaction.2

So, what defines success? For many owners, success is a number. Hopefully, a number large enough to meet the goals they wish to achieve after the sale of the business and taxes are paid. Often, the number alone is not enough. There are a host of factors contributing to each owner's definition of success. For some, it has more to do with validating all the sacrifices that were made to build the business to where it is.  A deep dive into understanding yourself and your motivations, wants and needs will help crystalize your vision for life post transaction.

I use a simple equation to help owners through the selling process. The formula is: Success = Process x Vision x Desire. The formula works well for getting owners to the closing table. It also helps an owner prepare for transition to their next role in life. In later posts, we will discuss Process and Desire. For now, let's look at how a clear understanding of your vision can help you define success.

Examples of Vision elements include:

  • How much money do I need net of taxes and after transaction fees to support goals for the future?
  • What financial structure am I willing to accept?  How much cash up front?
  • Who would be an acceptable buyer? What would I need to know to answer that question? 
  • What cultural changes will they bring to MY company?
  • How will they treat MY employees?
  • What will be my post-transaction involvement in the company?
  • Does my company define who I am and how will I deal with that after the transaction closes?
  • How do I define my legacy?
  • What will I do in the first year after the transaction?
  • Is my spouse involved in the planning?
  • How do I prepare my children for the wealth they will receive in the future?

Here are a few examples of owners who failed to plan or did not think it was necessary to fully understand their vision for the sale of the company and their life after the sale.

I recently had an owner we will call Jim. Jim told me he wanted to sell his business, buy a 60' Sunreef catamaran and sail around the world with his family. He told me he needed $3 million dollars. That amount would support the purchase of the yacht and his lifestyle through retirement. I asked Jim how he came to that number. Did he have a financial advisor and had the advisor run a financial plan? He said no and assured me he had worked out those numbers “in his head”. He told me any financial advisor could get him an annual return of 10% and any advisor worth his salt could get 15%.  By the way, Jim was 40 years old and had two children under the age of 10 and the boat cost $1 million dollars. Jim's financial reality was not aligned with his future vision. Jim was going to join the 75% club.  In aviation terms, he was going to run out of gas before reaching his destination.

Sarah owns a manufacturing company.  I met Sarah through her attorney.   He told me she was a real mover and shaker in the industry and loved coming to work.  He also said, Sarah has always been conflicted about selling her business and she had recently had a failed attempt to sell.  The buyer was a Private Equity firm and she and her investment banker had negotiated a price that would ensure she would never need to work again, and she would be more than able to meet her charitable and estate transfer wishes.  It did not take long for me to understand Sara’s identity was closely tied to the company and she had not thought about how she would find that same sense of self-worth after the sale.  The private equity deal fell apart because two weeks prior to closing, Sarah discovered the buyer was not going to run HER COMPANY the way she wanted it run.  Sarah had failed to truly understand her vision for the future and the emotions tied to a sale.  She could not define her destination and therefore could not land the plane.

I met Tim through his long time CPA.  Tim owns a manufacturing company and has had great success over the years.  He has two adult children. His eldest daughter is the company COO and his son is working at an architectural firm.  During my first meeting with Tim, I asked him to tell me his vision for a successful transition.  He told me his plan was to sell the company to his eldest daughter and he would pull away from the company and provide mentoring when needed.  He said he was ready to start the process today and he wanted to be out of the company with an initial payment from his daughter before the end of the year.  I arranged another meeting with Tim and his wife.  She was doing some of the day to day bookkeeping.  The meeting was to meet her and get her thoughts on the transition.  Tim led off the conversation with a detailed plan to transition the business to his daughter.  The look on his wife’s face was one of utter confusion.  She knew her husband was ready to sell the company, but this was the first time she heard her husband’s plan to sell the company to their daughter.  She said “what are you talking about?  Jenny does not want to buy this business.  She and her husband have just started a side business and she is planning on transitioning to that full time so she can work from home with the kids.”  Talk about a problem!!  Tim had failed to research and plan the route to his destination and just hit a mountain!! 

Having clarity will allow you to steer through the many issues without feeling the stress that comes naturally from the process. For many business owners this means getting started now. Make sure you have experienced counsel so that you obtain and maintain personal clarity.

1. Why Many Business Owners Can’t Sell When They Want To, forbes.com, February 5, 2017
2. Exit Planning Institute. The State of Owner Readiness Survey 2013 National Survey Final Report. 2013