As a business owner or leader, you WILL experience transition. It starts early in life and continues throughout life. Many of us go to day care at an early age. Then there is a transition to a more structured environment called kindergarten. The next step is moving to an even more structured, day-long experience in early grade school. Most of us can remember how challenging the years of middle-school were when our bodies are transitioning on their own, whether we like it or not. For many, high school is a good experience. Some go on to vocational training, military service, community college, or college. The next step is often to start your career, changing jobs every few years as you advance in knowledge and skills. Others go on to graduate studies, medical school, law school or something else. At almost any point in time, some go on to start a business. In fact, here is a link to an article on the youngest entrepreneurs. https://www.business.org/business/startup/youngest-entrepreneurs/
Once you are in business, transitions don’t stop. The company grows and changes at various points. I’ve noticed 7 reasons transitions occur in business. When they do, the owner(s) will need to assess the value of the business.
1. Health Issues
Your own health can prevent you from working in or on the business. Owners have heart attacks and strokes. They can be diagnosed with cancer and require extended, expensive treatment. Leaders can be in car accidents or something at home that is disabling. Insurance can help with costs, but not the business. The value of the business can take quite a hit if you are integral to the business.
2. Family/Spouse Issues
Unfortunately, possibly the most common issue is a divorce requiring a value be placed on the business to settle up. Just as the owner could have a disabling medical emergency, your spouse may have one and suddenly require you to spend more time at home. Parent’s often become a challenge as they age and put more responsibility on an owner. Children can become disabled or sick to a point that it affects your ability to keep the business running.
3. Partner Issues
Corporation agreements exist because you can anticipate many type of things that can happen with a partner. As in the above, or the below items, a partner may want to exit, or may exit due to death. A valuation of the business will likely be needed.
Many an owner has decided later in life that they want to work less. They may even want to stop working altogether. This may mean selling a portion of the company to private equity or transition more ownership to a family member. Some owners will establish an Employee Stock Ownership Plan, which, legally, will require a valuation annually.
5. Want to do something else
Some serial entrepreneurs just want to do something different. They are invigorated by new things and get bored when a business reaches a certain size. To transition out of the business and get the monetary resources they need for a new endeavor will need to value the business.
6. Need infusion of capital, talent, resources to grow
A number of business leaders reach a point where they know they need more money, resources, geographical exposure, or skills than they have now. They want to keep the business, but need some outside help. Family offices and private equity or often interested in providing the necessary resources and connections for a minority ;stake in the business, requiring a valuation.
7. Unsolicited offer
A company 5-20 times your size may be looking, strategically, to expand. For instance, I recently noticed an HVAC contractor sold his business. As I investigated more closely, I found a private equity company was buying up HVAC contractor around the country. Strategically, they are trying to take a local, family owned type of business and turn it into a subscription based, national system, possibly with franchisees. An owner can get an unsolicited offer for a business. If you know the value of the business and have been working to grow it, you will be in an excellent position to get the most in this situation.
Want to get a quick assessment of the value of your business? Take this 13-minute survey assessing how you are doing on the 8 drivers of value.