Accounting for Your Company’s Next Owner

If you are the owner of a small toAccounting for Your Company’s Next Owner medium-sized business and you did not go to work today, would your business start to fall apart? If the answer is yes, you have the most common problem that comes up when selling a business. It is too heavily dependent on the activities of the business owner.

If you really want to sell your business and get the highest valuation possible, it is time to start to let go and eventually “fire” yourself.

The concept of letting go of a business, which may have taken decades to build up, is a difficult personal challenge for many business owners. Most of the really successful ones, who made their success based on their personal efforts feel so intertwined with the business that it is almost like an extension of their own personality. To let go feels like a part of themselves is being taken away.

Letting Go of Your Business Means Replacing Yourself

Regardless of this inner feeling, if the decision is made to sell the business, the goal is to get the business to run well without much participation of the present owner.

One way to learn quickly about what needs to be addressed is to have the owner suddenly announce a two-week absence from the business and see what happens. Businesses that are heavily dependent on the owner will immediately show stresses and things will stop functioning properly. Those things that break and things that do not continue to function well are what needs to be addressed.

Solutions may include delegation of responsibility to existing workers and/or bringing on new members to the executive team to handle such issues. Klein Hall CPAs can be very helpful with planning this effort.

The Sell the Business, But Stay On

When a potential buyer of the business sees that the business is clearly highly dependent on the direct, active involvement of the existing owner, they may ask the owner to stay on for awhile and to continue working for the company. While this may look good on paper in the sales agreement, it rarely works out well.

The problem is that the new owner has ideas about how to run the company and wants to implement changes. This is only natural; however, it can cause conflicts from the different management styles and major confrontations if there is a serious divergence of opinion about how the company should operate.

If there is a partial payment made for the ownership transfer with some amount due after the present owner has worked for the new owner during a transition period, this may become very problematic. The outgoing owner does not want to disrupt the business and wants to get the final payment for the transfer of ownership. The new owner may want to make changes and not have the same alignment of interests with the outgoing owner.

It is best for the selling owner to exit the business upon sale to avoid these headaches or to limit the transition time to a very short period of only a few months.

If you want to maximize the positive results, get the best price, and “pass the baton” to a new owner in an elegant way that keeps the hard-earned business legacy going, it is vital for the present owner to be able to “walk away” from the business and have it run well without the owner’s involvement. It is also important to have good accounting systems in place, to get all the accounting records in order, to make sure all the accounting is brought up-to-date, and to organize the proper calculations for allocation of the ongoing revenue streams (such as sales made, but revenues not yet collected) during a transition period.

Contact Klein Hall CPAs. We help many businesses and organizations in the Chicagoland area.

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