In normal times, owning an established and stable business can be a really good deal. Your team operates like a well-oiled machine, the business is consistently profitable, and as the boss you have enough money and free time to pursue the lifestyle you desire.
But as we know, conditions in 2020 were anything but normal. After COVID-19 started disrupting the economy last March and April, business owners who for years had enjoyed a high level of freedom suddenly found themselves working harder than ever to keep the doors open and protect the value of their business.
As we see more and more signs of normalcy coming to the economy, some successful business owners over the past year are more than willing to hand the reins over to someone else. If a so called “lifestyle business” fails to deliver an attractive lifestyle then it is worth considering other options.
Options for “lifestyle business” owners
But making the decision to sell a business shouldn’t be taken lightly, especially one that you may have put in considerable effort building from scratch. In addition, there are advantages to maintaining a financial stake in the business, such as ongoing income or the ability to pass it on to your children to secure their financial future.
When working with clients who are considering selling a lifestyle business, I recommend first thinking about all of the alternative options available to make sure they are making the right choice.
Some owners may want to retain financial control of their business while handing over management to a hand-picked replacement within the business. It may be true that raising a veteran employee can ease the transition process. However, there are a number of other factors to consider. First, is there a suitable candidate currently, and if not, what would be the right position to hire someone with the hope that they can eventually take on a leadership role? Another thing to consider: if a sufficiently talented person is out there, can you afford to have the time it takes to decide if they are the right person?
For this scenario to work, a lot of things need to go right. The process is expensive and time-consuming – three to five years on average – and usually has little chance of success. It should also be noted that during this period you will still have to manage the business, which falls short of the goal of offering a less work-oriented lifestyle.
Another option that may seem attractive at first glance is to intentionally downsize your business. By keeping only a handful of important customers, you can reduce your staff (thereby reduce expenses) and come out on the other end as a much more streamlined business that takes a lot less work to manage.
Of course, the hard part is figuring out how to cut expenses so that they are more in line with those of a small business. It could mean abandoning dedicated employees. And it can also mean facing the higher volatility of a small business. If you have 50 clients, losing one will not have a major effect. But if you only have 10 clients, losing one could be a much more pressing issue.
Unlike the preparation process, recruiting a successor is done with full knowledge on both sides that the candidate is expressly hired to eventually take over the management of the company (usually after a brief period of familiarization with the company through a managerial position.). The candidate may be a new employee who reports to a board of directors of a company or a potential buyer who intends to actively run the company.
While there is a bit more certainty in this arrangement than with preparing for a successor, sometimes candidates leave unexpectedly, which brings you back to square one and prolongs your involvement in an active leadership role. .
After weighing the pros and cons of these other options, you may be more certain than ever that you want to sell your business. If so, this process begins with thinking about what kind of buyer might be the best fit.
Your buyer could be someone early in their career looking for a business to actively manage. It could be a late-career executive who has partnered with an investment group. It could be a competitor in your industry or even a client looking to grow strategically. Business owners rarely think about potential buyers until it’s time to close a deal, but they often know more people than they realize. Once you’ve decided to sell, don’t just take the first option that presents itself – think broadly about the options that might be available and the implications of working with each business partner.
Sellers sometimes don’t know who a potential buyer might be until they start asking. A professional advisor can ask smart questions to get that conversation going, help structure a salesperson’s thinking, make connections, and come up with original ideas.
The story of a company
Some forward-thinking business owners have already gone through the sales process and come out to the other side. The hospitality industry is one example, which has seen a level of disruption in 2020 that is causing business owners to think deeply about the future. My firm worked with two partners in a hotel management group who, amid the changes brought by the pandemic, were reassessing their careers and decided to turn to hotel investment. They were thinking about their lifestyle goals for the next few years and figuring out where they wanted to be financially.
We helped them structure the sale of their business, then negotiate with potential buyers, and ultimately they sold to a large, independent hotel management company. Because they knew what they were looking for and were selling in a good market, they easily found a suitable buyer and successfully completed a transaction that allowed them to devote their time to hotel investment work.
If the past year has shown us anything, it’s that life is precious and finite. If you are a business owner whose business is not recovering as quickly as you might expect, or if you are just looking for a work situation that offers a more relaxed lifestyle, it is worth considering how you can make a change through a sales or succession plan.
About Frank Williamson
Frank Williamson is the CEO of Oaklyn Council, a consulting firm that assists private companies and not-for-profit organizations with mergers, acquisitions, capital raising, investor relations, estates and other strategic corporate finance decisions.