A significant hurdle that must be cleared before any business sale or succession is eliminating the business’s reliance on the exiting owner. A 2023 U.S. Exit Planning Association study found that only 2 out of 10 business owners believe their business could operate successfully without them for more than three months. If a business can’t thrive without the owner at the helm, in short, the business is not ready for a sale or succession.
In this article, we’ll discuss the four critical business readiness factors:
- Reducing the business’s dependence on the owner
- Enhancing the business’s attractiveness to buyers
- Ensuring the exit or succession plan will meet the business owner’s financial goals
- Positioning the business so it’s transferable to the new owner
Top 4 Readiness Considerations for a Successful Business Succession
These four factors form the foundation of a business that’s saleable and positioned for a smooth and profitable transition.
1. Reducing Dependence on the Business Owner
Many small businesses are too reliant on their owner for strategic direction, operational leadership, day-to-day decision-making, and managing key relationships. This reliance significantly decreases the perceived value of the business to potential buyers, who would view the company like a house of cards.
According to BizBuySell, businesses with high owner involvement typically sell for 20–30% less than similar businesses with a strong, independent management team.
To reduce business owner dependence, an exiting owner should take these six steps to delegate, document, coach, and build a competent leadership team:
- Live by the company’s mission, vision, and values, and celebrate the positive aspects of the company’s culture.
- Document standard operating procedures (SOPs) to institutionalize the business’s systems, methods, processes, and controls.
- Grow a management team that can independently make critical strategic and operational decisions.
- Invest in leadership succession and talent development.
- Mentor managers to ensure knowledge transfer and let leadership make essential business decisions from which they can learn.
- Build vendor and customer relationships at the company level, not just through the owner.
Why This Is Important: If the business can’t run without you, it’s not a business, it’s a job. And jobs don’t sell.
2. Enhancing the Business’s Appeal to Buyers
Buyers seek businesses that are stable, predictable, scalable, and attractive. They are drawn to companies with strong fundamentals and a sustainable competitive advantage. The major drivers of business attractiveness include:
- Recurring revenue streams
- A diverse customer base (with no single customer making up more than 15–20% of the business’s overall revenue)
- Professional accounting practices, coupled with timely, accurate, and complete financials that are GAAP-compliant
- The ability to grow in the market year after year
- Strong market and brand reputation
- Operational efficiency and scalability
Why This Is Important: According to the Value Builder System, companies that score high in these areas can increase their exit valuation by up to 71% compared to those that score poorly.
3. Ensuring Business Value Supports Retirement Goals
The business must be sellable and generate enough revenue from the sale to support the owner’s post-exit goals and objectives.
The major seller retirement readiness questions are:
- How much is my business worth today?
- How much money do I need from the sale of my business to retire comfortably?
- Is there a gap between my business’s value and my retirement needs?
- How long would it take to grow the value of my business to reach my retirement target if the value isn’t sufficient to support my retirement?
Why This Is Important: According to the Exit Planning Institute (EPI), 78% of owners have never had a formal business valuation, and over 60% overestimate the value of their business.
If the sale of the business won’t support your retirement, you have two choices:
- Scale down your retirement plan, or
- Hire a consultant to help you accelerate the value of your business.
Identifying whether you will have enough money for retirement is perhaps the most important reason to start the exit planning process early. Action steps to ensure a comfortable next chapter include:
- Getting a formal valuation from a qualified professional
- Working with a Business Exit Consultant (CBEC®) to model different exit options and help you implement your exit plan
- If your business won’t support your retirement, implement a business value acceleration plan at least three to five years before you plan to exit the company to close the gap
4. Positioning the Business for Easy Transfer
Even an attractive business can fall apart during a transition if it’s not transferable. A business is transferable when its people, processes, contracts, licenses, and IP are ready and attractive to a buyer, and the business can easily transfer from the current owner to a new owner.
What makes a business transferable to a buyer?
- Legally transferable contracts with customers, vendors, and employees
- Documented intellectual property, such as trademarks, patents, and proprietary methods
- Up-to-date legal compliance and corporate governance
- Non-compete agreements with major employees
- Technology systems that are accessible and scalable
Why This Is Important: Failure to ensure transferability can result in deals falling through late in the process or a significant reduction in the purchase price, jeopardising the exiting owner’s retirement plan.
Exit on Your Terms by Ensuring Your Business Is Ready with IEPA
A successful business exit requires finding the right buyer and ensuring the business is fully prepared for the transition. A business that is ready for the owner’s exit can function without the business owner, satisfies the owner’s retirement needs, appeals to buyers, and transfers cleanly.
Major Business Readiness Questions:
- If I left my business for three months, would it survive?
- Do I know what my business is worth, and is it enough for my next chapter?
- What would a buyer see as risky or unattractive in my company?
- Have I taken steps to “de-risk” and “de-owner” the business?
A Certified Business Exit Consultant (CBEC®) can work with you to maximize value and ensure your business is a sellable, scalable, and self-sustaining asset, giving the buyer the kind of company they want while also providing you with the exit you deserve.
Find a Certified Business Exit Consultant® Now!
About the Author:
James J. Talerico, Jr., CMC® CBEC®, is an award-winning author, blogger, speaker, and nationally recognized small to mid-sized (SMB) business expert, with outstanding business consulting, succession planning, value acceleration, and exit planning credentials. He is the owner of Greater Prairie Business Consulting, Inc. (www.greaterprairiebusinessconsulting.com) located in Irving, Texas, and has helped thousands of business owners throughout the U.S. and Canada maximize their business performance and exits for more than 30 years. Jim currently sits on the IEPA’s Education Committee.