Cash In: What’s a Transition?

admin May 15, 2014 0

Okay, let’s start at the beginning…..

WHAT’S A TRANSITION?

A transition as we use it is a term for a business ownership change.

How Not to Sell a BusinessThat could be the sale of the business to an outsider or the transitioning of ownership to a son/daughter or employee. Seems me to the only other three possibilities are to sell it for parts, close it down and walk away or croak while you’re trying to finish that last estimate.

Anyway, your business will transition in either a planned or unplanned fashion. And while things never go as planned; planned things happen best.

I welcome your comments and questions. Email me at tom@cprint.com. Now let’s start …

TWO BROAD CATEGORIES OF TRANSITIONS

As mentioned, transitions are of two types: selling to an outsider or transitioning to an insider.

In order to sell to an outsider, generally, the company should show earnings of $100,000 or more. All is not lost if it doesn’t but many business brokers won’t deal with companies that have less than minimum earnings. And that’s important because business brokers are the middlemen in the vast majority of all business sales whether we like them or not; so it’s important that your company be substantial enough to sell.

What do I mean by earnings? We’ll deep dive into this in a future edition but generally let’s consider it money left over after expenses (sales – direct materials – wages paid to others – overhead = income before owner’s compensation). That needs to show $100k plus.

And it needs to show it for the last three to five years as that’s the time horizon most consider when valuing your business. Oh, yes, it should show an upward trend in sales and preferably, profitability as well.

What’s the key to selling to an outsider? Have a great set of financials going back at least five years.

However, a signfiicantly profitable company would have the option of transitioning to an insider if desired. For less profitable or smaller companies, internal transitions are more common than selling on the open market. That’s where a son/daughter or employee takes over ownership through a variety of methods.

Now some owners of all success-sizes of businesses have their heart set on transitioning to a son/daughter or other person. Nothing wrong with that at all but it does usually have an impact on the retirement plans (read cash).

That’s because the majority of internal transitions require the seller to carry paper (finance) so the value isn’t put into the retirement account on day one. In fact, many banks require the seller of a business on the open market to have some “skin in the game” by carrying part of the sale price as well.

It’s just that transitioning to an insider may require carrying a huge percentage as a loan (80% or more) when selling to an outsider would generally require less (20% or less). BTW it’s estimated that some 65% of sellers carry paper.

The perfect scenario is for the owner to take money out of the business over time and have funded their retirement. Then at the time of transition, the owner wouldn’t HAVE to have cash in order to survive. Of course, a minority of owners do this.

The key to transitioning to an insider is the insider’s training. Can they run the business? Last thing you want to do is to have to come back and run the business when you’re 80 in order to protect your retirement.

Finally, let’s not forget a third option: selling for parts. Equipment, inventory and customer list are the main assets when the external and internal methods fail. So some cash can be raised.

To summarize, companies earning $100k or more have the most options. Companies earning less often still sell, but they tend to rely on an internal transition. And, if all else fails, you can still usually sell parts.

Commercial: at CPrint, we help printers prosper as well as plan for transition/sale of the business. While we can’t guarantee what you can get for your business, we do know that planned things happen best. If your business isn’t earning $100k, we can help you fix it. If you need to transition to a son/daughter or employee and they’re not trained on the business side of the business, then we can help do that. If you find it hard to be actively selling your business while at the same time growing it to maximize your value, we can help keep you focused. And, yes, we can provide you with an estimate of the value of your business as well. Call (888) 427-3714 or email tom@cprint.com and ask about our CPrint Silver program.

May all your trails be happy ones …

Happy Trails

Tom

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