Business Successions and Transitions: What’s Your Plan?
Planning for the succession or transition of your business is something often discussed yet seldom acted upon proactively. So much so that there’s an old joke about business owners’ lack of attention to the topic. If business owners answer “three to five years” when asked about when they plan to exit their business, five years later, their answer to the question will again be “three to five years.”
All jests aside, there are many paths available to accomplish a successful transition or exit. That’s why I asked Christopher Rhyme, partner with The Business Transition Group, to spend some time with one of my Vistage groups. Chris has a background as an attorney and business banker and transitioned to his family’s business several years ago.
Chris shared some important data with us and posed a number of questions to help with key transition decisions. He talked about the importance of defining exit goals and the model guardrails his firm works to create with clients to enable focused discussions.
The week after our session, I sat down with Chris and asked him what singular most important thing business owners should consider as they’re considering an exit or transition. Watch my video with Chris, and the next time you’re struggling with the issue of succession, give me a call. Even if your timeline is the ever-popular “three to five years,” there are some things we should discuss and some experts I’d like to introduce you to.
[00:05] Chad Harvey: Hey, everybody. Chad Harvey here with Chris Rhyme. Chris is a recovering lawyer and an investment banker by background. A couple of years ago, he transitioned to the family business, so he’s now eating his own cooking. And the family business is The Business Transition Group. They work within the lower middle market. They’re coast to coast and border to border. They help companies transition their success to the next generation. I was fortunate enough to bring Chris in to work with one of my Vistage groups last week, where succession and transition were the topic du jour. So, Chris, for our audience, we don’t have a huge amount of time today, but I did want to pick your brain on something. What do you see out there that are the singular most important things that business owners should consider as they’re considering an exit or a transition? And go.
[00:54] Chris Rhyme: Thanks, Chad. I would say there’s probably two things among many that are really important to think about. Number one, free cash flow is going to be king. That is paramount to a successful transition. Because it doesn’t matter whether you’re building EBITDA to sell to a third party, whether financial or strategic buyers, or you’re transitioning internally to key employees, family, or doing an ESOP, you’re going to use the future cash flow of the business to buy the business in those scenarios. So, the recurring predictability of that free cash flow, profit, EBITDA, any of those terms is going to be so important. And growing that is going to help, regardless of which transition path you take. So the first of two things I’d say is profoundly important is build strong, predictable, recurring profitable revenue.
[01:41] Chris Rhyme: The second thing is exits take time. We got into this some in your group chat, but especially when you put the tax overlay on top of it, it’s not uncommon to be thinking of a seven to 12 year transition time if you’re going internal, as opposed to external. Even external, you have some challenges with failed processes where you couldn’t find the right buyer, you couldn’t agree on price, you got beat up during quality of earnings, things like that.
[02:04] Chris Rhyme: So, you need to allocate enough time to realize there will be a season of your life at the end of your business where transitioning your business becomes your business. If you don’t give it that kind of thought and effort and attention, you’re probably not going to do it particularly well. And because you spend most of your life building this, and that’s where the majority of your value is, I highly recommend you spend the time and effort to give it the time it deserves. And also, get good professional help as needed so that you get the value that you deserve from the business that you’ve spent your whole life building.
[02:35] Chad Harvey: Boy Chris, if I could turn anything into a bumper sticker out of what you just said, it would be, “There will come a season of your life where transitioning your business becomes your business.” I see that time and time again. That is beautifully succinct. You could be a poet.
[02:51] Chris Rhyme: Appreciate that. My last name’s Rhyme, so maybe there’s something there.
[02:53] Chad Harvey: There you go. No relation to Buster, right?
[02:57] Chris Rhyme: None.
[02:57] Chad Harvey: Okay.
[02:57] Chris Rhyme: I mean, he might be my long cousin, but we have yet to work that out.
[03:01] Chad Harvey: Fair enough. Thanks so much for your time today, Chris. It was a pleasure chatting with you.
[03:06] Chris Rhyme: Thanks, Chad. Bye.
[03:07] Chad Harvey: All right.