By Maurie Cashman
Retaining ownership of a business while backing away from the daily management is a question we often get from owners. They wonder if, rather than exiting, they can back away from their company.
Business owners are telling us things like,
- “I’d like the freedom to do whatever I want, whenever I want”;
- “I’d like to back away from my business”;
- “If I could cash out, where could I invest and generate a reasonable rate of return?”;
- “I don’t want to worry about money, but if I sell, I’m unlikely to get enough cash in today’s merger and acquisition marketplace.”;
- “I doubt I could match the return I get on investments in my own business.”
Faced with these concerns, owners often wonder if, rather than exiting, they can back away from their companies. They may think about treating their company as more of an investment while continuing to own it. The issue for many owners then is how do I back away and let others run the business without transferring ownership and control?
Ownership Transition Planning can help to enable you to create a path toward a transition without giving up ownership.
In order to create an Ownership Transition Plan that allows you to retain ownership, you should:
- Establish your business objectives;
- Have your business valued;
- Determine future cash flow needs for yourself and for your business; and
- Build a business capable of running without you.
Let’s look briefly at each component.
Establish your timetable for backing away from your business. Establish your objectives clearly. What does backing away mean to you in terms of:
- time commitment;
- emotional involvement;
- financial guarantees;
- outside activities?
Have your business valued by a qualified valuation expert. It is critical that you understand the value of your business today in order to make an informed decision that considers all of your options. When you have established the current value of the business, you will be better able to define the measures that need to be taken to increase its value and how much each of those measures might affect that value.
Determine the amount of income that you need the business to provide you. Work with your investment advisor, CPA and Transition Planning Advisor to determine these needs. Develop concrete, written plans for how you will achieve this level of income and the timeframe for completing those plans.
Put components in place. The characteristics of a business that can run without you may be the same characteristics third party buyers look for. A company that is by key employees and that generates satisfactory cash flow without the involvement of the owner may be a highly-attractive business. It can be valuable both to third parties and to the owner who wants to step away. To create that type of business, you should have in place the following:
- Documented sustainable earnings
- Increasing cash flow
- Strong management team
- Growth strategy
- Operating systems that improve sustainability of cash flows
- Impressive facility appearance; and
- Conservative debt levels
Pay particular attention to developing and properly motivating your management team and creating repeatable, sustainable internal systems. Your company needs systems and management in place capable of replicating your leadership in order to run successfully without you.
The most valuable businesses are those in which the owners are no longer needed. Planning to step away using ownership transition planning can create a more vibrant business. When your day of departure eventually arrives, both you and your business will be prepared.