8 tips to ensure a smooth transition when selling your business

You’re selling your business. Before you sign it over to the new buyer, there are a few things you’ll need to complete to ensure a smooth transition.

Ensuring a smooth transition involves planning, says Benoît Mignacco, Vice President, Digital Lending at BDC, who often sees a lack of it. “People think everything will be beautiful after a transition, but they don’t do enough preparation to make that happen,” he says. “Forecasts are often too optimistic.”

According to Matthew Kellow, Vice President, in BDC’s Growth & Transition Capital, which finances business transitions, a quick exit will not likely happen. “You should anticipate being asked to stay involved by the buyer to make sure the transition goes smoothly. Sellers are rarely prepared for this process.”

The two lay out some tips to follow and red flags to keep an eye out for:

1. Negotiate a favourable sale

The seeds of a smooth transition are planted before the transaction. The process starts with negotiating a clear, detailed sale agreement and finding the right buyer. The ideal buyer is someone you can work well with and who shares your vision for the business.

“If there’s good harmony with the buyer, things tend to work much better,” Kellow says. “The buyer may see significant value in your knowledge of the business, its customers and employees, and will likely seek a mutually beneficial arrangement to capture this value.”

2. Consider an insider succession

As in a family succession, inside buyers are already familiar with the company culture and clients, and are more likely than outsiders to preserve the owner’s legacy. An insider is also more likely to have a good handle on the company’s value.

“In an insider transaction, there’s less change in the culture of the business, and the employees feel more secure. The seller also has a personal attachment to the successors and is usually willing to help if there’s a problem,” Mignacco says.

3. Plan the transition with the buyer

A well-thought-out transition plan will assist buyers and their financial partners (lenders and equity investors alike) with the transaction. The more closely you work with them to plan the hand-over, the fewer problems there will likely be.

Consult your lawyer, accountant and other advisors on what information you should provide and when. “The buyer will want a lot of input in how the transition happens,” Kellow says. “A lot of communication has to be mapped out. It’s a risky time for the buyer. A sale can create a lot of disruption in the business.”

4. Prepare for disruptions

Entrepreneurs underestimate the stress and turmoil of an ownership change. Making matters worse, businesses often use shorter-term loans to finance the transaction. Such loans come with lower interest rates but need to be paid back quickly. That squeezes cash flow in the critical 12- to 24-month period after a transaction closes.

“Profitability is affected by the costs of the transition, adjusting to the acquired company’s culture and unexpected expenses,” Mignacco says. “It’s important to do what-if scenarios to prepare for disruptions.”

5. Ensure the buyer has financing room

If you’re providing financing for the deal, ask the buyer about their capital structure and make sure the business will be on sound financial footing after the transaction. Transitions are often highly leveraged, leaving little room to raise more money if forecasts are missed.

It’s important for buyers to consider repayment terms—and not only the interest rate—when weighing financing options. Some lenders offer capital principal holidays, longer amortization periods and flexible repayment options.

6. Communicate with employees and partners

Keep in mind the emotions and stresses that your employees will endure in a transition. Work with the buyer to plan how to reassure them. Good communication is critical. You may also need to offer incentives, such as retention bonuses and stock options.

“From a buyer’s perspective, your employees represent a lot of the value of the business,” Kellow says. “They may hold key corporate information in their minds. Your employees need time to adjust. You don’t want to lose the top sales guy right after you announce the sale. You’re dealing with a living, breathing business.”

Also figure out with the buyer how you will tell customers, suppliers and financial partners.

7. Don’t count on synergies

Hoped-for synergies between the buyer’s business and the new one often don’t work out after the transaction. When they do, they often aren’t as significant as expected or take longer to materialize.

A formal post-merger integration (PMI) process is one way to increase your chances of obtaining the full benefits of an acquisition. It will allow you to establish the objectives for the acquisition and then put a project management structure in place to ensure the two businesses are properly integrated.

8. Be ready to let go

The new owner may want you to have a formal relationship with the business after the sale, such as a board or consulting position. That’s especially common if you are selling to an individual or financial buyer such as a private equity firm. If you are retaining minority ownership and/or providing financing to the buyer, will want to understand what voice you will have for key decisions and what role you’ll have in the company after the sale closes.

At the same time, you should be prepared to let go. “The seller is used to having all the power and often isn’t ready to relinquish that,” Kellow says. “Sellers should understand what’s expected of them through the transition, to make the transaction a success and ensure their legacy continues.”

Next step

Discover essential steps to prepare your business for sale, including finding buyers, boosting the value of your business and creating a trusted advisory team by downloading the free BDC guide, Selling Your Business: A guide for entrepreneurs.