We define a ‘Relationship Sale’ as a sale to a family member or key employee — someone you have a ‘relationship’ with in the business already. When planning your exit strategy, a ‘relationship sale’ to a family member or to a key employee can be easier, and perhaps more reassuring, than finding an outside buyer. But many business owners will need to finance the sale of the business, especially if their chosen successor does not have the financial means to cash you out of the business. If you suspect this may be case, keep reading to learn how to make your relationship sale a more successful one.
Creating a successful relationship sale is a time consuming process; a lot of hard work and planning must go into a productive sale. Starting early will ensure that you will have the time to work out details and enhance your business while you are still in control. And if you encounter a few bumps in the road, which you will, it won’t throw the entire plan off course.
Know It’s Going to Take a Few Years.
A relationship sale to a key employee or capable family member takes time. The current business owner must be willing to commit to remain in control for between three and eight more years, preparing the business and the successor. If you do not have this time, you may need to explore other options.
Define What You Want Most From the Business.
Ask yourself what do you want to get out of your business once you have exited. Knowing what is important to you will make planning for your exit a lot easier. Do you need a certain amount of money to maintain your lifestyle? Do you want to exit by a certain date, or birthday? Do you want to define a family legacy? Do you want to create a sustainable business that stands the test of time? Knowing these things before the relationship sale is of the utmost importance.
Your exit plan will inevitably begin with consideration of all of your options. Some find it useful to write down each option and evaluate the business benefit, employee benefit and personal/owner benefit. With this objective view, you can map out your plan.
Share Your Exit Plan – Appropriately
When the time is right, you’ll want to share your plan -- not with anyone and everyone, but first with the critical people who need to be aligned to make it happen. Most owners are concerned that by sharing their plan, their best employees will flee. It’s possible they will, but if you have built a plan that demonstrates legitimate opportunities for growth and they can see themselves as a key piece of that plan, they probably won’t. Offering them golden handcuffs or other incentives may be wise, if they are truly key to your business.
Sharing it will take some flexibility away, but it is an absolutely essential step. You need the key people to know your exit plan and to take it seriously, and without a written plan it is harder to get that respect. You are already working with your buyer so having the option to show them your plan, gain their support and alignment to it, and to be able to discuss and edit your exit plan as time goes on is mutually beneficial. It makes the transfer smoother, giving you an advantage that an outside sale would not.
Grow the Value of Your Business
The more valuable your business is, the bigger profit you get once you sell it. Buyers will value (and of course pay more for) your business more if it has the potential to keep growing. Not every owner wants or needs the big payout. Increased business value can also position your capable family members or key employees for their own success and leave you with the pride of business legacy.
Groom Capable Key Employees or Family Who Desire Ownership
A team of leaders that can operate and run your business without you is highly valuable to any buyer. In a relationship sale, it is critical that the new owner be willing to invest in their business, personally and financially. Developing and grooming your team before you leave is crucial.
Ensure Your Buyer is Ready for New Role
Transferring ownership too soon or to an ill prepared employee or family member can be detrimental. The new owner must be prepared for his/her new role. Being a CEO/Owner requires a very different level of responsibility than a C-Suite role. The risks are far greater. If your buyer is not ready, be prepared to stay an extra few years to build their skills, experience, confidence and competence…. Or be prepared to step back into the business if it falters.
Expect to Finance the Sale of the Business
Make sure that your buyer realizes that they will have to invest real money to buy the business. Drawing out a financing plan will make it more likely that you get what you need and want out of the sale, and will give you confidence that the new owner is capable of paying you the full value of your business. Often in a relationship sale, owner financing is done through the cash flow in the business.
Keeping these factors in mind when preparing for a relationship sale will help you make a successful sale to a key employee or family member. Good luck!