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Changing Ownership for Your Small Business? Why You Need a Business Transition Plan

why you need a business transition planRegardless of the kind of exit you're considering for your business, it's going to take time to complete and will have an array of effects on you, your employees, your family, your finances, and more. In today's post, we'll elaborate on why you need a business transition plan.

Types of Exit Plans

Part of having a plan means knowing what you intend to do and why. While there's a proliferation of nuances within each type, exit plans can be broken down into three main groups:

  • Transfer of Ownership — In business, this phrase literally means a property changing hands from one owner to another, and in the context of this post, "property" refers to your business, and "owner" can refer to a person, several people, or an entity. It can be done outright (i.e., in full with an immediate payment for your assets) or gradually (granting monthly income through long term financing payment plans). This is the type of exit strategy you'll need if you plan to pass a family business onto a new generation.
  • Selling the Company — This may sound a lot like the last type of plan, but in this case we're referring to the sale of the tangible and intangible assets that make up your business. In this case, only the assets and liabilities that the buyer agrees to are purchased, and it allows you to sell only a part of your business. It's important to note that any of the contracts your business has with others will not automatically transfer.
  • Closing the Business — In this case, you liquidate all of the assets associated with your company, from the furniture and fixtures to your accounts receivable and intellectual properties. This can be useful if you're closing your business in order to pay debts.

Why You Need a Plan

If the fine print associated with selling your business isn't enough to convince you to plan, here's our short list of the six most important reasons for why you need a business transition plan.

1. Others Depend on You

Businesses do not grow, exist, or close in a vacuum. Whether you're taking your employees, subcontractors, or family members into consideration, it's important to remember that a lot of people are counting on you and the cash flow that your business represents. You want to do your best to leave all stakeholders involved in a positive position. This will take a measure of coordination, which is exactly what a plan provides.

2. Business Exits Include Risk

Like starting your business — or any project your business has taken on — there is risk involved. In those cases, you develop risk management strategies to prevent and mitigate the problems risks can cause. Having a business exit plan means that you can determine the risks of whichever strategy you choose and avoid them so that every choice can be made with confidence in the fact that you won't be leaving hard earned money behind.

3. There Are Legal Concerns to Manage

As a business, there's a number of legal documentation and engagements that need to be dissolved or transferred in the sale process. There are permits, licenses, and business names to deal with. If you're business is closing, you also need to officially dissolve your business with the government so that you aren't liable for various taxes, filings, and more.

4. Organization and Clarity Are Important

No matter how large or small, there's a myriad of connections, responsibilities, and expectations that need to be dealt with when selling your business. Like any other project, different people have different roles and other entities will expect different deliverables. Having a plan means everyone knows what their role is and what they're getting or losing. It will also ensure that everything is covered in the sales agreement.

5. You Need to Know What Your Business Is Worth

Whether you're selling your business in whole or in part (assets or shares), business valuation is vital, especially when you consider that the values of shares and assets can influence whether or not you or your buyer have additional costs, discounts, or exemptions. Clearly laying out what things are worth — before and after you make the sale or close your doors — will help you better determine which steps need to be taken and when. For instance, unlike other assets which you can probably get 80% of their value, accounts receivables are significantly smaller in value if you sell them after your business is closed. To maximize their worth, you'll want to collect them before you close if you can.

6. Have a Clear Path to Success

The process and the steps you need to take is the core of why you need a plan, and it's exemplified in all the reasons we've already discussed. Even selling the business whole with an immediate payment isn't like selling possessions to a pawn shop — it takes time, and it takes due diligence. Having a plan means you'll know when you want to start the process of selling your business. For instance, you'll have to evaluate if you've accomplished what you set out to do with your business or if your dreams and focus have fully moved away from your business. As with any projects your business delivered, you can have benchmarks and goals by which you can ensure the transition is successful.

Consequences Without a Plan

We mentioned risks in the reasons above, and all risks have consequences. Believe it or not, having an exit strategy even when you aren't planning on selling your business can be important. It acts as a form of risk management for the unexpected, including sudden financial hardship, disability, or death. Without it, your business could be thrown into chaos.

Beyond that, there's various concerns that can affect the value you get out of the business transition. Executed poorly, it could greatly affect your retirement fund, whereas when executed well, it could even maximize your fund possibilities. There are a number of liabilities associated to owning a business and its associated assets, and if you haven't got a plan in place, you could be stuck being responsible for those liabilities. It can even cause complications in family relationships — which children receive shares, and if they don't, do they receive anything or is it defined by who put in face hours at the office? It can go beyond that, because not having a plan could mean losing access to your personal goals in selling the business entirely.

>> Learn more about Business Exit Strategies

In one touching example, a woman in the process of selling her business to a third party got so frustrated that she nearly called it all off. Her adviser reminded her why it is she chose the plan she chose: she didn't want her children to have the life she'd had in taking over the business. Without that plan, her reasons would have been forgotten and she may have made a choice she'd later regret.

The process of exiting your business will take time, and more likely than not will be fraught with all sorts of frustrations and pitfalls. You had a plan to build your business and find success, and this is the very core of why you need a business transition plan. It lets you protect your brand, honor all your hard work, and reap the benefits that you deserve. Of course, knowing why you need a business transition plan is only the beginning.

If you need help learning how to create and execute a strong business exit plan, consider our Business Exit Strategies course from the PCC Small Business Development Center. This three session course is taught live online, and it gives you the tools you need to take action, including business counseling. Contact us today for more information about this course or to register.

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The Oregon Small Business Development Center Portland Community College has  helped thousands of businesses over the past 30 years. We combine one-on-one  advising with programs taught by business experts, giving our clients the  resources they need to grow their businesses. We’ve celebrated many successes  with our clients. We'd love to celebrate your success. 

Topics: Small Business, Growing a Business

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