Navigating the Nuances of Business Ownership Transition

Owning a business is a huge accomplishment. It requires countless hours of hard work and tenacity to transform what began as a business idea into launching the operations, recruiting the team, and implementing the endless activities needed to run a successful business. Moreover, the business life cycle ebbs and flows with economic cycles, market trends, pandemics, and evolving consumer behaviors. Simply put, business ownership is the ultimate balancing act of creativity, planning, execution, and supervision.

Life happens, and just like anyone else, there may come a time when a business owner begins to consider a change or even retirement. However, implementing the change can be far more complex for a business owner. It may begin with a seemingly simple inquiry from an interested party that prompts the critical question: What is the value of my business? The owner may also wonder: Are family members interested in the business or perhaps my management team? The process of figuring out when and how to step out of the business can be overwhelming and adds more to the balancing act. Much like the adage “opening up a can of worms,” a simple inquiry opens the door to a lot of intricacies that an owner might not be ready or equipped to deal with. Rockland Trust has established a Business Owner Advisory Service, to guide owners through the process of establishing a thorough, well-conceived plan and developing strategies to consider in a business ownership transition.  

It is a sobering fact that only 50% of businesses available for transition achieve a successful ownership transfer. Given this backdrop, it is important that business owners carefully prepare for an ownership transition and keenly understand how the business could be perceived by an acquirer. When a business is in top form, the risk to the acquirer diminishes, which in turn, increases the business’ value and improves financial terms. Above all, it also broadens the pool of interested parties, which may lead to increased bargaining power and choices.

Potential acquirers evaluate two key attributes of a business when considering an acquisition: attractiveness and readiness. Attractiveness is almost intuitive, and is based on initial impressions regarding the industry, reputation, public information, and trends. Does it check the basic boxes and meet the necessary criteria? Once interest is established, acquirers delve deeper into the business’ readiness for a successful ownership transition.  Readiness is far more complex and ultimately drives the business value. It is estimated that as much as 80% of a company’s worth is captured in four intangible assets:

    1. Human Capital is the embodiment of the team’s talent. Navigating human capital is a formidable challenge, involving the daily tasks of recruitment, motivation, retention, and evolution of personnel. When a business is overly dependent on its owner, its value diminishes. Conversely, the value of a business soars when owners implement employee development plans that foster growth, offer increased responsibility, and delegate  authority.

    1. Customer Capital is the lifeblood of any business. Without customers, there is no business. Building robust customer capital is a potent strategy for enhancing value. Proactive owners build customer relationships through the customer’s perspective. They identify what the business does well and hone in on those strengths. Likewise, they ascertain shortcomings and make necessary improvements or adjustments. A business with a diverse customer base that purchases a product or service in a recurring, persistent manner drives value, particularly when customer relationships are with the employees and managers rather than the owner. To that end, we advise against any one customer representing more than 20% of the total revenues of the business, since nothing diminishes value more than one big customer.

    1. Structural Capital encompasses all the business operations. It includes processes, documentation, know-how, technologies, tools, procedures, and real estate that enable the business to function efficiently. A business with well-defined structural capital is less dependent on the owner, attracts and retains employees, and customers enjoy a reliable, consistent, dependable relationship. Employees follow a proven process to deliver consistent results to the customer. The customer relationship is tied to the brand of the company.

    1. Social Capital, or company culture, is the culmination of effectively managing the other three intangible assets. Culture is the glue that binds people together and attracts them to the organization as employees or customers. Social capital represents the brand, teamwork, rhythm of the day-to-day operations, and the way customers interact.

These four intangible assets are instrumental to a sound business strategy (not just exit planning). They need to be quantified, cultivated, sustained, and safeguarded to be “ready” for ownership transition. Ideally, an attractive business is always prepared for an ownership transition; that way, the owner can determine the optimal timing for such a transition based on their terms.

Rockland Trust is committed to supporting our clients through significant transitions and milestones. Our Business Owner Advisory team helps business owners assess the attractiveness and readiness of a business. We leverage a wealth of experience, knowledge, and resources to guide business owners through strategic planning, including internal or external succession planning, while de-risking the outcome and exploring strategies to increase the enterprise value of a business. Initiating this process early allows ample time to build value and establish a business that is perpetually ready for transition. In addition, our Financial Planning team is ready to provide projections to ensure you meet all of your life goals, whether it be retirement income or adequate resources to support your next big idea.

If you are a business owner and are interested in discussing how to navigate business ownership transition, financial planning and business strategies, please reach out to your Relationship Manager.