Episode Description:
Business transition is a journey, not an event. In this episode, host Elizabeth Ledoux explores the benefits of people considering a business transition to start with: “How?” For example: How will the transfer of your business to your successors be structured? Tap or click the play button below to listen to: The HOW of Business Transition.
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Taking a structured approach can minimize disruptions and preserve the integrity and legacy of your business.
In this episode, Elizabeth explores three strategies business owners can take when planning to exit a business: liquidation; transitioning to an insider; and transitioning to a third party.
As Elizabeth mentions in this episode, you’re invited to go to https://transitionstrategists.com/42 and download our free “How Transaction Guide” that explores many of the topics of this episode.
Connect with Elizabeth Ledoux and the Transition Strategists:
Website: https://transitionstrategists.com/
Facebook: https://www.facebook.com/thetransitionstrategists
Elizabeth on LinkedIn: https://www.linkedin.com/in/elizabethledoux/
Transition Strategists on LinkedIn: https://www.linkedin.com/company/transitionstrategists/
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Get Elizabeth Ledoux and Laura Chiesman latest book, “It’s A Journey: The MUST-HAVE Roadmap to Successful Succession Planning”: https://amzn.to/3oq2LQv
This episode was produced by Story On Media & Marketing: https://www.successwithstories.com.
The HOW of Business Transition Transcript
Elizabeth Ledoux: You’ve probably had a great business and run it fairly well, probably very well been successful for quite some time. And with it being liquidated, all of the people in the community that that business serves, including all the customers, all the vendors that supply things to that business, all of the philanthropy that you do, would you’ve heard me say that I think business owners are some of the most generous people in our communities, and also all the employees and their families. There are a lot of people that depend on the business. So I think liquidation allows you to shut it down. It also though, takes away and in a sense, the opportunity for another entrepreneurial person, a younger person to come in, and not have to start from the beginning to be able to start partway through wherever your business is at, and take it forward from there. Welcome to the business transition roadmap. My name is Elizabeth Ledoux. And through my years, I have seen how communities thrive. When business succession and transition are done. Well, me and my team at She Transition Strategists have been helping business owners develop and implement transition strategies for over 30 years. And on this show, we want to help you by giving you the roadmap to a healthy business transition. Let’s get started. Hi, everybody, and welcome back to the Business Transition Roadmap Podcast. Today, I’m doing a solo episode, just to talk a little bit about the how, as you know, the foundation of transition, my belief is that it is a journey, it’s not an event. And many people start with the how and how much. So if you start with what I call the two H’s, the how and how much, generally, what happens is, you just have an over abundance of opportunities to move forward. And it’s really hard to be able to understand which one’s really going to get you to where you want to go. And how much is going to get you there as well. So we believe that starting with the four w’s is the best way to do it. And today, what I’m going to do is I’m going to talk about the how, so I’m going to jump into that level. And we’re going to talk a little bit about some choices that you have, we put together a great tool, we call it the how transaction guide. And that is, if you want while you walk through this podcast, you can go download it, it is at transitionstrategists.com/42. And that’s also going to be in the show notes at the end. So you can go get it there as well. So why do people start with the how it I think is emotionally and logically a very good place to start. They’re used to staying in the business and working in the business. And when they go to talk to your, you know, the normal advisors, say like a CPA, Accountant or maybe a business attorney or even an estate attorney. Those people tend to deal with the how. And I think that business owners are, you know, they’re close to those people, and rightfully so, those people are great advisors in their life, they’ve helped with taxes and helped with mitigating tax and helped with keeping the business safe and, you know, working to keep the business and keep you as an owner on the on the right path. So highly valued people. And that’s where that’s what they do is they deal with the how a long, long time ago, I had a lady come into a workshop that I was doing. And when she saw what we were doing and saw our compass with the four w’s, the who, the when, the what and the why. And then the how and how much. The light went on for her. And she said, wow, my dad and I started with how and how much. And we got so deep and so buried and so we didn’t know which way to go. And we ended up stopping our conversations for the last two years. And so she was hopeful that by starting down the road of understanding the other four w’s that they could navigate the how and the how much when you get to the how and Again, we put together this how transaction guide, when you get to the how just at a high level? If you’re going to start with that or go there, there, the first question that you want to ask yourself is, do you want to exit the business like actually transact the business while you’re living, or after you’re not on this planet after you die, that’s a big question. And sometimes it’s a split, sometimes it’s both. You might want to transact a business partially while you’re alive. There can be some benefits to doing that. It could be that you get to work in the business until you’re no longer there, and you don’t have anything else that you’d really like to do. So why not start to consider that, it could be that you want to work with somebody in the business, say, a son or a daughter, or just stay, stay connected to them, and enjoy that. So a family member, you also may choose to transact all of it while you’re alive. So you may say, oh, you know what, I am done with this thing. And I really want to get out of the way, I want to go do something else. And I think it would be better for the new owners to be able to navigate and move forward on their own. So that might be a good choice. Or you could say, no, no, no, I want to exit. When I’m no longer on the planet, I’m gonna own this 100% Until I die. So is any way forward of those choices is any way better than another? And they can’t completely answer that. Because their tax consequences and all kinds of other things that go into that decision. And that understanding. However, when you first start with the how, I think it’s important to know, you know, what are you really trying to achieve? And what do you want from this business in your life? And how do you how would you like to live your life out? So I don’t think that there’s a right answer to any of the how it’s just truly preference. So let’s just say that you decided that you wanted to exit when you’re no longer on the planet. I’ve had quite a few clients who have done that. And they think the number one important thing for that scenario is if you’ve got the plan in place, there are plenty of stories out there in the world of, you know, gosh, somebody just keels over, and they’re gone. Heart attack, car crash a variety of different things. And when that happens, if there’s no strategy in place for a transition of the business, not the estate, the estate says, oh, yeah, you can transact over here. And it goes into your state and blah, blah, blah. But if there’s no plan in place of how the business gets run while it’s being sold, or transitioned, about who is supposed to maybe do, what about what your intentions are, how you take care of people in that situation, then it really is a free for all. And I think that’s where some of the stories come from that are out there that did not go well. So instead of it being structured, with a strategy communicated and everything’s in place, and people know what to do.
Elizabeth Ledoux: People don’t know what to do. We just had a lady. She actually is one of my great associates. And her uncle passed away. And it was unexpected, and she ended up flying out to go visit her, the spouse of that uncle, the two happened to be in business together. And the spouse wasn’t ready to run the other side of the business. And it was completely unanticipated, just a cancer thing and short term, four weeks left. And that was the end. So they’re picking up the pieces not only when the person is gone and dealing with all of the grief and all of those other things, but they’re also picking up the pieces of Gosh, in business, how do I do payroll? Right How do I keep this thing afloat so that I can keep it going because I need the business and I want to continue with it. So if you’re going to choose know that you want that you do not want to exit while living then I would just recommend and you know heartfelt recommendation. Have some kind of a plan in place and enjoy your life until the end and in the business. And then help others deal with it when you’re not there. So let’s wander down the idea of yes, I want to exit while I’m living. If I want to exit while I’m living one, you can decide what percentage you want to transact. It doesn’t have to be 100%, it could be less, let’s just say that you’re gonna transact 100% of it. There are three basic methods that you could look at at a very high level, there are all kinds of details underneath these three methods, and a lot of work in all of them. But you’ll look at these three options. So one is transition to an insider, which would be somebody that you know, so it’s an inside transaction, you’re going to transact the equity of the business, and you’re going to transact it to someone you know, the second one is to transition to a third party. So in that one, what you’re going to do is go find probably like a business broker or merger acquisition, investment banker, type, person, or firm, and you’re going to go transact to somebody that you don’t know. So you’re gonna go find them and transact to somebody you don’t know. And then there’s the liquidation piece. And liquidation just says, you know, I don’t think this business is worth transacting, I don’t think that anybody would want to come in and take this business on. And so what I’m gonna do is, I’m just gonna liquidate it, or shut it down. And that one to me, I think is a, I think it’s a sad choice. It’s a sad choice for a lot of reasons, because you’ve probably had a great business and run it fairly well, probably very well been successful for quite some time. And with it being liquidated, all of the people in the community that that business serves, including all the customers, all the vendors that supply things to that business, all of the philanthropy that you do, would you’ve heard me say that I think business owners are some of the most generous people in our communities, and also all the employees and their families, there are a lot of people that depend on the business. So I think liquidation allows you to shut it down. It also, though, takes away and in a sense, the opportunity for another entrepreneurial person, a younger person to come in, and not have to start from the beginning to be able to start partway through wherever your business is that and take it forward from there. So whether that new person is able to come in, and just maintain it and continue it, or if that person is able to come in and grow it. Those are opportunities for a new young entrepreneur, that might be a better opportunity than to build a company just like yours from scratch. So we’ll walk into transition to a third party next. So moving up the transaction guide, and the transition to a third party. When we’ve worked with business owners before, many will go that route, they’ll just say, hey, I want to, you know, I want to transact my business. And of course, it’s going to be to a third party. And when they walk through that door, and they start really looking at transitioning it to somebody they don’t know, when they have to go through the merger acquisition firm to go find somebody that they don’t know, who would like to buy it. And to, it’s a little bit frightening, because if your business is, you know, if it is your baby, and you care deeply for it, which most entrepreneurs do, and owners, they, they really want to have the business continue well, and they care about whether or not the people are taking care of and just the culture of the business and you know, how it operates, and its well being somebody who will come in and care for the business like they have just that it’s meaningful to them. So transition to a third party, it’s a different kind of a road. And I think the biggest challenge for a business owner that’s going that direction, is when the potential owner that they’re looking at who’s interested in interested in the business doesn’t match up with their values. They you have less control so you’re just going out finding a third party saying Yep, go for it. With I have to say the business and it’s almost sometimes you can be a little hands off, but most of the time that third party wants you to stay, because you’re integral to the business. And most of the time, there could be what’s called an earn out in that, and with the earn out, that means that you’ll get some of your money up front, maybe, hopefully. And there’s this urn out that says, if the business continues to work on the level that it’s working, or better, and we can meet these goals, then you get the other piece of your money later. That’s an interesting thing, because you’ve lost control of the business, so you no longer are making the decisions. And you also though, are things happen from their decisions that may impact your ability to get the urn out. And the other thing is, you get to stay on and watch them manage your business in the way that they choose to, which can be a little bit challenging at times. So third party might sound easy, but usually that owner is tied, and has a complete lack of control. So hoping that the person listens to him, but not always true. The third one, the transaction to an insider. That one is, in a way, one of the hardest roads, because it takes the longest time, if you’re looking to though stay in the business work with your kids work with somebody just have a little bit less responsibility and a little bit less impact on your time. Maybe even spread out some of your investment. So that you can, again, still reap some some of the benefits that are in a growing business, but also help somebody else to reap some of those benefits as well. The transaction to an insider’s kind of a fun time and a good way to go. In that you can transition to an insider by using a gifting strategy or a sales strategy on by the way, in a transaction strategy. And that sales strategy, which also applies to transitioning to a third party, whenever you sell a business, you can sell it two major ways. And I’m being very high level here. But you are either going to sell the entity itself, so you sell the company, whether or the LLC, with all of the shares and everything that goes with it, or you sell what the company owns, which is the assets. So it’s either the sale of the whole entity, or the sale of the assets.
Elizabeth Ledoux: And when you sell the whole entity, all of the liabilities come with it. So the person who’s acquiring it takes those on, when you sell the assets, the business becomes just a shell, and all the assets are taken out of it. And so those assets are free, of free and clear of prior liabilities, etc. And many times in a third party sale, you’ll end up with sale of the assets. Not always, but most, I would say a good portion of the time. So if we go back to transition of an insider, or to an insider, you got the sales strategy, again, either have the entity or have the assets. So that can be discussed. You also have a gifting strategy. And a gifting strategy can be helpful, especially with a family I haven’t seen it used too much with employees, but I’ve seen it used a bit depends on how, what the circumstances are and how the family is operating, etc. But anyway, you can do a sales strategy and a gifting strategy, you also can do a mix. And again, this is very high level. So with a gifting strategy, you could gift it directly to the person or you could put it into an entity, the entity could go into some kind of a trust or something like that, depending on who your successors are. And that so with a sales strategy, you can do a mix. And let’s say that you had a belief because this then ties into your value system, which goes back all the way to one of the w’s goes back to the why. If you have a foundational belief that you believe you’re it’s important for somebody to work for buy in, have skin in the game, whatever you want to call that. Then you might want to do a partial sales strategy, whether gifting strategy. If you have kids in and kids out of the business and you have a foundational value and belief that Anybody in the business can have ownership. But anybody out of the business cannot have ownership. So kids out of the business, no ownership kid in the business, yes, ownership, then in order to balance your estate, right, because you want to be maybe fair and equitable to those not in the business, then you might need to have the one who is in the business buy it from you, because then the money would move from the business into your state. And once it’s in your estate, then it can be divided up amongst your children fairly and equally. So there are a lot of different strategies that go into transitioning to an insider. The same is true at times with even employees, right. So if you have employees, sometimes it’s a mix of an employee that is a non family member, and a family member is also an employee. So you’re have some gifting and some sale going on there. The other times, there might be some kind of a gifting type strategy in helping a member of your team buy in, just so that they can get started. Because as soon as they’re started, and it might be sweat equity that you’re talking about, which is basically it’s going to be a gift, even though they have to pay tax on it, it’s still they don’t have to pay for the actual interest in the business. There are all different kinds of gifting strategies that might be used even in non family type situations. So I think you can see, I just gave you just a high high high level thoughts on the how transaction guide, there are a lot of choices to be made. And when you start making them, I hope you can see that it’s not as simple as saying, Hey, I’m going to sell to a third party. There are a lot of steps and a lot of emotion that happens in that in the same with transition to an insider, there are a lot of steps in that considering tax, considering estate considering fairness, considering a quality. And yeah, whether you have a favorite or you don’t have a favorite all of those things matter. So by starting with the how and how much, but let’s just say the how, by starting with the how it is tough to because there is there are no like bumpers or no guards that say that this is what I’m trying to accomplish. Then if I’m trying to accomplish this, I’ve got four strategies that work for me. Instead, you know, I don’t know what I’m trying to accomplish. I have a vague idea maybe. And I have more than four, I have over choice, because there are too many, because I don’t have the context to walk down the road and actually understand which How is going to be best for me. So I’ll just recap the house transaction guide. First question. Do you want to exit while you’re living? Yes, no, or maybe a little bit of both, right? Maybe some now fallen living. And someone I’m not. If you go down the no road, only heartfelt ask again is help those who are going to be left to understand what they’re supposed to do, how they’re supposed to do it, and what your wishes were. So that they can be fulfilling to themselves and also to you. And if you walk down the yes road you are in, you’re gonna transact while you’re living, you’re gonna move on to our next adventure. And the three big ways to do it are to liquidate, that’s one, again, a sad choice, in my opinion, transition to a third party could be the best option for you, knowing that you might have to stay on and, and, you know, be a helper without control. And then transition to an insider where you’re able to maybe take a longer road. Have fun with the people that are that you’re mentoring and working with and enjoy that journey until it is your time to completely transact the business and leave. So I hope this was a an interesting podcast for you. We love doing this work and it is complicated. So don’t forget to take a look at our website. We do have the how transaction guide and it again, is at the turn it’s at transitionstrategists.com/42. So transitionstrategists.com/42. And you can also find the link in the show notes. Thank you for listening to this episode of the Business Transition Roadmap. If you are listening to this and you find yourself wanting to go deeper into these topics and start the process of putting together your transition strategy, I’d love to offer you a free initial strategy session with my team, where we’ll help you to explore the future transition of your business, head over to www.transitionstrategists.com To schedule a call. Thank you again for listening, and I’ll see you on the next episode of the Business Transition Roadmap.
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The Business Transition Roadmap with Elizabeth Ledoux
How do communities thrive? When businesses experience healthy growth and transition. Join CEO of The Transition Strategists, Elizabeth Ledoux as she and her guests identify what makes a successful business transition roadmap. If you know you want to transition or exit your business “one day”, today is the right day to start planning. This show will give you the roadmap.
