Business Ownership: Should You Sell Your Business Or Keep It In The Family?

Owning a business is a significant achievement, representing years of hard work, dedication, and personal investment. As a business owner, you will eventually face the critical decision of whether to sell your business or keep it in the family. This decision is multifaceted, involving financial, emotional, and strategic considerations.

Whether you are contemplating how to sell your business or considering passing it down to the next generation, understanding these critical aspects will empower you to make informed decisions that align with your long-term goals. In light of this, we sat down with our business coaches Andrew Lamb and Des Ryan to share their expertise on this topic. Let’s dive into the crucial factors that will guide you through this significant transition.

Understanding the Decision to Sell Your Business or Succeed

What are the key indicators that suggest it might be time for a business owner to consider selling their business?

Andrew Lamb: I think timing is really in the eyes of the beholder. There are multiple factors to consider. Fundamentally, there are only two options for a business at the end: sell or close. I always advise my clients to sell the business. Most business owners have 80 to 90% of their wealth tied up in their business, so why give that away for free? That’s your nest egg, your retirement. When discussing moving on, it’s essential to decide between selling or closing.

Several indicators can suggest it might be time to sell. Longevity is one factor. How long can you stay in the business? Do you still have the energy for it? Many business owners, even in their late 50s, feel tired and exhausted from running their companies. Are you able to continue growing the business, or is it plateauing? The market’s condition also matters—are you on an uptrend, plateau, or downtrend? These are crucial indicators.

Another important aspect is the emotional connection to the business. Many small business owners, especially in the UK and Ireland, have their identity tied to their business. Their name, or their family’s name, is above the shop. They view it as their legacy and might be reluctant to let it go. However, you have to make a choice: do you walk away from your business, or do they carry you out feet first?

Des Ryan: You touched on a crucial point: the energy and passion for your business. Do you still have it? Many business owners in their 40s and 50s lose the passion they once had, and the business becomes more of a burden.

Andrew Lamb: Exactly. They started the business because they loved it, but now they’re dealing with HR, finance, and other responsibilities they didn’t sign up for. They’ve lost their passion for the business. When selling, it’s important to understand that it doesn’t mean an immediate exit. There’s often a transition period where the former owner stays on and continues to do what they are good at, while new people help with the rest. Selling your business can mean bringing in extra support and rediscovering your passion for the parts of the business you love.

Making the decision to sell your business or keep it in the family is a significant milestone for any business owner. Various indicators suggest it might be time to consider selling, such as longevity in the business, emotional connection, and the energy required to maintain operations. As Andrew Lamb and Des Ryan discuss, it’s crucial to evaluate whether you still have the passion and drive to run your business. The next step involves understanding how external factors like market trends and economic conditions influence this decision.

Are there any kind of market trends or economic conditions which are really going to influence the decision to sell or pass down a business?

Andrew Lamb: Yes, market conditions can significantly influence the decision. In the US, it’s currently a buyer’s market. There’s a massive transfer of wealth happening due to the baby boomer generation retiring, creating a lot of opportunities. Right now, there are about two and a half million businesses for sale in the US and over 200,000 in the UK and Ireland.

Another important factor is the state of the economy. We’re in a downturn, and interest rates are high, making it risky to buy a business. That’s why due diligence is crucial. While it might not seem like the best time to sell, there’s never a perfect time. It ultimately comes down to what’s best for you, your family, and your business. Even with thorough planning, there’s no perfect moment, but having a plan helps you make unemotional decisions when the time comes.

Market trends and economic conditions play a pivotal role in determining whether to sell your business or pass it down to the next generation. With a buyer’s market emerging due to the retiring baby boomer generation, opportunities for selling have increased. However, the current economic downturn and high interest rates make due diligence more critical than ever.

Andrew emphasizes that while there’s no perfect time to sell, planning based on the data you have available helps make informed, unemotional decisions. Alongside market conditions, internal business metrics also provide valuable insights into the right timing for a sale or succession.

Are there kind of internal business metrics that owners can monitor to gauge the right timing for a sale or succession?

Andrew Lamb: Yes, there are several key internal metrics to monitor. First, look at the operational performance of the business. Key performance indicators (KPIs) like EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and profit numbers are critical. These figures help value the business. You should be examining whether these numbers are growing. Potential buyers want to see consistent growth over the past three to four years, not just last year’s performance.

Revenue trends are also important. Is your revenue continuing to rise? Buyers are interested in profitable businesses with positive cash flow, not distressed ones. They seek businesses that are operationally sound and have growth potential.

Other crucial metrics include cash flow, inventory rates, and the quality of your team. Do you have a strong team capable of running the business independently? Are your employees and key team members nearing retirement? It’s vital to ensure you have a good bench within the business.

Additionally, consider your customer base. Are you constantly refreshing it? Are your customers and team members at risk of retiring soon? Continuously developing your team and maintaining a robust customer base are essential. Ultimately, the main metrics to focus on are revenue, profit, team strength, and customer base. If these are performing well and showing growth, it’s a good indication that your business is in a strong position for a potential sale.

Internal business metrics, such as EBITDA, profit numbers, and revenue trends, are essential for gauging the right time to sell or pass on your business. Andrew explains the importance of these metrics in valuing your business and attracting potential buyers. A strong, growing business with positive cash flow and a capable team is more appealing to buyers. Additionally, considering the readiness and capability of a potential successor within your team is crucial. This leads us to explore how to evaluate if succession is a viable option for your business.

How can a small business owner determine if succession is actually a viable option for their business?

Andrew Lamb: Succession, whether it involves a family member or someone within the team, requires that your business can operate without you. If it can’t, you’re the bottleneck. You need to build systems and processes (SOPs) and ensure the business runs smoothly without your constant presence. This approach not only makes the business more attractive to potential buyers but also sets it up for successful succession.

You must create a business with solid foundations, proper measurements, scalable systems, and the right team. For example, I had a conversation with someone recently about what makes a great CEO. A CEO’s role is to create the vision, mission, and direction for the team, secure the necessary capital, and hire the right people. The team manages the customers, the customers support the business, and the business supports the CEO. It’s a cycle.

Des Ryan: Exactly. You described it as a cycle: the CEO, the team, the business, and back to the CEO. If you start this cycle correctly, the business can take care of itself and its leader.

Andrew Lamb: Yes, absolutely. It’s about building systems and processes that work independently. Here’s a test: go away for a week without your phone or laptop. When you return, check if the business is still there, still operating, and possibly even doing better. If it is, you’re on the right path.

Succession requires a business that can operate independently of its owner. Building solid systems, processes, and a strong team ensures a smooth transition. As Andrew highlights, a great CEO focuses on creating a vision, securing capital, and hiring the right people. Ensuring the business can run without you makes it attractive for both buyers and potential successors. Evaluating a potential successor’s capabilities and readiness is a critical aspect of succession planning, which we will delve into next.

What criteria do you think should be used then to evaluate like any potential successor’s capabilities and readiness to take over the business?

Andrew Lamb: You need to understand what motivates and drives them. As practitioners of the “why,” we’re looking for leaders with specific skills and a plan for growth. It’s about hiring the right people who can grow the business. First, determine the direction you want the business to go and identify team members who can help achieve that.

One of the key questions a leader should ask is, “How can I help you achieve your goals?” This enables team members to drive the right behaviors and outcomes. It’s not about doing the work for them but challenging and supporting them appropriately.

A powerful tool I use is the 1-3-1 methodology: anyone can come with a problem, but they must bring three written solutions and suggest the best one with reasons. This approach helps build and grow people’s potential.

In succession planning, ensure there’s a framework and training in place. Set clear goals and objectives, articulate them well, and hold people accountable for delivering on them. Set standards, not expectations, for deliverables and measure them.

Externally, ensure you have great hiring practices. I prefer action plans over vague 30, 60, 90-day plans. New hires should start taking small actions from day two or three to move forward and multitask effectively, depending on their role.

Des Ryan: Great answers, Andrew. It’s also crucial to consider the vision, mission, and culture of the business. While these elements can be improved by new leaders who identify and fill existing gaps, it’s essential to ensure they align with and enhance the company’s core values.

Identifying the right successor involves understanding their motivations and ensuring they have the skills and vision to lead the business. Andrew introduces the 1-3-1 methodology to foster problem-solving and leadership growth within the team. Clear goals, frameworks, and effective hiring practices are vital for successful succession. As Des points out, aligning the successor with the business’s vision, mission, and culture is essential. Preparing for succession or sale involves several critical steps, which we will now discuss.

Preparing for Succession or Sale

What critical steps do you think a business owner needs to take to prepare their business for a successful sale?

Andrew Lamb: Number one, have a plan. Determine when you are going to execute and what numbers you need to achieve. Number two, make sure your business is ready for sale. Think of it like selling a home; nobody wants to buy a disheveled house. Your business should look presentable and have solid foundations and good customers.

Next, your financials need to be in order. The first thing we look at in financial due diligence is the numbers. Talk to your CPA and get your numbers in the right state. When preparing for sale, you want to show higher profits since profit multiplied by a number gives you your sale price.

And number three, get yourself ready. One of the biggest challenges is that business owners often have nothing planned after the business. Their identity is wrapped up in the business. Find hobbies, join clubs, reintroduce yourself to your family. Make sure you have plans not just for the first three to six months, but for the next five years.

Des Ryan: It’s interesting you say that. I had a conversation with a business broker in Ireland, and he said the number one reason businesses don’t sell is that the owner isn’t in the right headspace to move on to life after business.

Andrew Lamb: Exactly. We focus on the business and financial plans, but also the mindset. What are you going to do? Sometimes business owners plan a big trip, like a three-month cruise. That’s great, but what after that? Often, they don’t know. So, staying in the business with the new owner for a transition period might be a good option. Most new owners want the previous owner to stay on to transfer their knowledge.

Having a plan for yourself is crucial, and it might actually be the most important step. Retirement or selling a business is a life-changing event, not just a short-term project. Even startups should have an exit plan. As Stephen Covey says, “Start with the end in mind.” The end is either selling or closing the business, and hopefully, it’s selling.

Preparation is key for a successful sale or succession. Andrew outlines the importance of having a solid plan, ensuring your business is presentable, and getting your financials in order. He also emphasizes the need for personal readiness, as transitioning from business ownership can be a significant life change. Des shares insights from a business broker, highlighting the psychological readiness required to move on. With these preparations in place, addressing legal and financial considerations becomes the next crucial step.

What type of legal and financial considerations need to be addressed when preparing for either a succession or a sale?

Andrew Lamb: There are many considerations. First, is it a stock purchase or an asset purchase? Who’s involved in the organization? What about the equipment? Legally, you need to ensure what you’re buying is exactly what you expect, with no surprises later. Litigation is a significant concern, especially if someone is selling and needs protection.

Legal steps shouldn’t be underestimated, and it’s crucial to spend good money on quality attorneys. If you cut corners on legal, the consequences can be substantial. We spend a lot of time on due diligence, examining every detail to ensure there are no hidden issues. Financial due diligence is equally important; we need to confirm the numbers represent the business accurately.

If you’re seeking a loan, banks will scrutinize every number and your business plan. In the US, the SBA backs loans, allowing for loans up to 80% of the business’s value, with some programs offering up to 100% for similar businesses. Understanding your financials and future cash flow needs is critical. You must ensure you have capital to run the business during the transition, as previous lines of credit may not continue.

Operational due diligence is often overlooked but essential. You need to understand the business’s operations, including SOPs, KPIs, the team, and the culture. Integrating cultures during acquisitions is one of the biggest challenges. You must know the culture you’re buying into and how it aligns with your own. Communication with the team is vital, as employees often fear losing their jobs or changes in their roles. It typically takes 14 different touchpoints for the team to understand and get comfortable with the transition.

We focus on documenting everything, especially the knowledge in the previous owner’s head, to ensure a smooth transition. All these factors contribute to preparing a business for sale, ensuring it’s ready for a buyer with everything in order.

Legal and financial due diligence is essential for a smooth transition. Andrew discusses the importance of understanding whether it’s a stock or asset purchase, ensuring proper legal protection, and thorough financial scrutiny. He also highlights the need for operational due diligence, understanding the business’s culture, and documenting crucial knowledge. Preparing a business for sale involves comprehensive planning and meticulous attention to detail. Navigating the transition process effectively is our next focus.

Navigating the Transition Process

What are the potential challenges and pitfalls that small business owners might face during any transition period and how do you feel they might be mitigated?

Andrew Lamb: The number one issue with any merger or acquisition is responding to immediate concerns from the team. For instance, if the company has faced salary cuts, someone might ask, “Are we going to get our salaries back this year?” Responding to such questions without understanding all the details can significantly impact your business. If you commit to something without knowing the full picture, it can cost you thousands of dollars.

Having a plan to address these questions is critical. You should talk to the previous business owner to understand what’s been going on and what to expect. When faced with a tough question, I suggest saying, “That’s a fantastic question. I don’t have the answer just yet, but I will come back to you within two weeks once I fully understand the topic.” This approach acknowledges the concern without making premature promises.

Another pitfall is not understanding your people. If you’re taking over a company that’s been around for 15 years, everyone knows each other, but it takes time for you to get to know your new team. We use tools like WHY and DISC to understand how to motivate and communicate with people quickly, so you don’t spend a year figuring out your team. Des, you do this too with your workshops to understand your people.

We provide new owners with insights into the organization, identifying growth opportunities and ensuring the right people are in the right roles. As a business owner buying a business, you need a solid plan. This includes an annual plan and knowing your five-year, three-year, two-year, one-year, and 90-day goals.

The transition period presents several challenges, including addressing team concerns and integrating new ideas. Andrew suggests having a plan to handle immediate questions from the team and understanding the existing business dynamics. Tools like WHY and DISC help quickly assess and motivate new team members. Des emphasizes the importance of the CEO’s role in guiding the team through the transition. Developing contingency plans for unexpected issues ensures a smoother process, which we will explore further.

What contingency plans should be in place to handle unexpected issues during the transition?

Andrew Lamb: Yes, having transparent and open conversations with the previous owner is crucial. We analyze all team members to identify solid performers, high achievers, and those who haven’t moved forward. This is an opportunity to make necessary changes if they aren’t a fit.

You need to have contingency plans in place, and this involves a lot of pre-planning. Sometimes, you won’t get all the information upfront, but during the grace period after buying a business, you can make those hard decisions. You may also be integrating your own team, so you need a plan for that as well.

Removing and rehiring someone costs as much as their annual salary. If you’re paying someone $40,000-$50,000 a year, rehiring costs the same. So, be strategic and intentional about bringing in new people and integrating them with the existing team to ensure continuous growth without setbacks.

Des, you and I have seen how new teams and ideas can change direction. It’s important to integrate these smoothly to avoid disruptions. The process often follows the stages of storming, norming, and performing. The goal is to quickly move through storming and norming to get to performing.

Des Ryan: Absolutely. I recently spoke with someone who is succeeding in a senior role as the owner phases out. The senior team is also stepping up, and their mindset needs to shift to elevate their performance and expectations for the business. It’s not just about one person; it’s about the collective mindset of the team to ensure success.

Andrew Lamb: Exactly. The CEO’s role is to set the vision and guide the team. As the business grows, some people will grow with it, and some won’t, and that’s okay. Always challenge the team to grow and not be comfortable in their current roles.

When hiring, don’t just hire for the current role. Hire someone who can grow into the next role or two. This approach ensures you have growth potential and the right mindset in place. It’s about succession planning from the start, identifying future leaders well before you need them.

Des Ryan: That really is succession planning, finding the next leader five years before you need them.

Andrew Lamb: Absolutely. When people are challenged and growing, they move the business forward. Set goals and standards, and have your team perform at that level before promoting them. In my corporate experience, we promoted people only after they demonstrated they could perform at the next level. Hope is not a plan.

Des Ryan: Yes, hope is not a strategy, as they say.

The Role of External Advisors

When considering business ownership decisions, especially whether to sell your business or keep it in the family, the role of external advisors cannot be overstated. External advisors include professionals such as financial advisors, business brokers, legal experts, and consultants who provide specialized knowledge and objective insights to help you navigate the complexities of selling your business or planning succession.

Financial Advisors: Ensuring Financial Readiness

Financial advisors play a crucial role in helping you understand the financial implications of your decision to sell your business. They can assist in valuing your business accurately, preparing financial statements, and ensuring your finances are in order. This is essential when potential buyers evaluate your company. A well-prepared financial picture can make your business more attractive and help you achieve a better sale price.

Business Brokers: Connecting You with Buyers

Business brokers are professionals who specialize in facilitating the sale of businesses. They have the expertise and network to connect you with potential buyers, negotiate terms, and manage the sale process. A broker can guide you on how to sell your business by identifying the right buyers and ensuring the sale is conducted smoothly and efficiently. Their knowledge of market trends and buyer behaviors is invaluable in achieving a successful sale.

Legal Experts: Navigating Legal Complexities

Selling your business or planning for succession involves numerous legal considerations. Legal experts ensure that all legal aspects of the transaction are handled correctly, from drafting and reviewing contracts to managing due diligence. They help protect your interests and ensure compliance with regulations, reducing the risk of legal issues down the line. Their expertise is crucial in understanding whether it’s a stock or asset purchase and handling litigation concerns.

Consultants: Providing Strategic Insights

Consultants like business coaches offer strategic insights and objective perspectives that can help you make informed decisions about your business ownership. They can assess your business’s operational efficiency, identify areas for improvement, and develop strategies to enhance its value. Consultants can also provide guidance on succession planning, helping you build a robust plan to ensure a smooth transition if you choose to keep the business in the family.

The Value of a Comprehensive Approach

Engaging external advisors provides a comprehensive approach to making critical business ownership decisions. Their combined expertise in finance, legal matters, and strategic planning equips you with the necessary tools to either sell your business successfully or set up a seamless succession plan. By leveraging their knowledge and experience, you can make well-informed decisions that align with your long-term goals and secure the future of your business.

Choosing the Right Path for Your Business

Contingency planning is vital for managing unforeseen challenges during the transition. Transparent communication with the previous owner and pre-planning help mitigate risks. Andrew stresses the importance of strategic hiring and integrating new team members effectively. Des shares insights on maintaining team performance and growth through the transition stages. The goal is to ensure continuous business growth and successful succession, ultimately preparing the next leader well in advance.

Deciding whether to sell your business or keep it in the family is a significant decision that requires careful consideration of various factors. From evaluating market trends and internal business metrics to preparing for succession or sale, each step is crucial in ensuring a smooth transition and securing the future of your business. By understanding these elements, you can make an informed choice that aligns with your goals and vision for the future.

If you find yourself at this crossroads, seeking expert guidance can make all the difference. At 4 Leaf Performance, our business coaching services are designed to help you navigate these complex decisions with confidence. Our experienced coaches can provide personalized support, strategic insights, and actionable plans tailored to your unique situation.

Take the next step towards securing your business’s future. Contact 4 Leaf Performance today and discover how our business coaching services can help you achieve your goals, whether you decide to sell your business or keep it in the family.