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What Are Some Tips In Ensuring A Smooth Transition When Buying A Business?



Posted By: Joe Ranieri, Business Broker: LA, Orange Counties.   Changing hands of business ownership can seem both exciting and daunting to all parties involved, but it's important that a smooth transition occurs to maintain or achieve success of the business. Here are some tips I recommend ensuring things go smoothly when buying a California small business.

Changing hands of ownership can seem both exciting and daunting to all parties involved, but it's important that a smooth transition occurs to maintain or achieve success of the business. Here are some tips I recommend ensuring things go smoothly:

1. No major changes: I specialize in bars and restaurants, although I sell all types of businesses, but a major piece of advice I would give to any new owner would be to make no large changes to the business. A new owner should make no large staffing changes, price adjustments, major renovations, because this could hurt foot traffic that the previous owner has established. Customers are fickle, and many come to a business based on habit, and when they sense too much change, they'll often stop coming, and once a customer leaves, they are difficult to get back.

2. Maintain high employee morale: Point number two plays into point number one, no major changes, but it's so important, that it bares repeating. Many customers have developed a relationship with the employees that have been solidified long before the business was listed and changed hands, so it's extremely important that employees feel secure in their jobs and are productive, because many times, if not most, they know more about how the business runs better than the new owner, and can be a major asset to ensuring success.

3. Strong training period: Knowing the ins and outs of a new business can be overwhelming, and many times an old owner might have "seniorities" and want to be on their way, but it's imperative that the new owner is properly trained. The old owner should stay on after the close of escrow for a minimum of two weeks or 80 hours, and introduce the new owner to customers, so they know that the business is in good hands. If the owner has carried a note, they may want to stay on longer, possibly as an employee, if they can, to make sure the business succeeds, because future loan payments depend on the business being a success.

4. Meet with vendors: A new owner should familiarize themselves with vendors and establish a relationship with them. Having a good working relationship with vendors is important and in a way they, with their timely arrivals and flexibility, help a business owner succeed. During the due diligence period, a new owner should see a paper trail of who the current owner does business with and continue to use their reps and vendors to maintain quality and consistency.

Unless the business is a total disaster, and a new owner creates a major shake-up, but then there really is no transition because it's an asset sale, and total change occurs, but other than that, a major theme that I would recommend to any new owner is: keep things the same, at least, at first. Make small changes, nothing major. There are other things that play into a smooth transition, and I encourage others on this BizBen Discussion Post to post their thoughts and ideas.

One factor business sellers should consider is that business buyers are often counseled by their lawyer, their CPA, their financial advisor, or their "Uncle Louie" that the seller should have some "skin in the game"; and even if the buyer doesn't need it, that the seller provide 10% to 20% seller financing to be paid in a year or two after the closing, or monthly over that time. The seller who agrees to that will generally get a higher price for the business which could even make the seller-financed portion a "wash"; but, the seller will have a vested interest in the buyer being successful and the buyer will be more comfortable with the deal.

One factor business sellers should consider is that business buyers are often counseled by their lawyer, their CPA, their financial advisor, or their "Uncle Louie" that the seller should have some "skin in the game"; and even if the buyer doesn't need it, that the seller provide 10% to 20% seller financing to be paid in a year or two after the closing, or monthly over that time. The seller who agrees to that will generally get a higher price for the business which could even make the seller-financed portion a "wash"; but, the seller will have a vested interest in the buyer being successful and the buyer will be more comfortable with the deal.
I honestly believe that the transition phase begins when the Seller and the Buyer meet for the very first time. What do I mean? It is all about chemistry. It is like a date that will hopefully lead to a second and third date and hopefully more dates. During this romantic or honeymoon phase, the two parties get to one another and both sides learn how to agree to disagree and all of the other nuances that most relationship have. In my opinion this one to one personal and yes professional relationship is the key to a smooth sale and thereby a smooth transition. One of my many metaphors to both my Sellers and to my Buyers is the metaphor of a marriage. I tell them that I would ideally like them to stay "married" for at least a year or so after the sale is consummated, pun intended. Here is my rationale, things are certain to arise after the sale is made. A letter from the Franchise Tax Board, a call from the city regarding the business license, a referral source who is confused as to the ownership change and so on. To ensure a smooth transition, the best formula is ensuring that both parties realize at least two things. On the seller's side, that the business sale should ideally lead to a prosperous venture for the buyer and to ensure this goodwill the seller should be as understanding and supportive as possible. It is all about karma! On the buyer's side, purchasing this new business comes with it a lot of unknowns and a certain level of risk. The buyer needs to understand that they need the seller to be there to help with the learning curve. I do understand that the transition will entail a lot of logistics as stated in Joe Ranieri's and in Christina Lazuric's comments, but again, in my opinion, the transition will flow a lot easier with everyone on board to include a competent agent leading the way.

I honestly believe that the transition phase begins when the Seller and the Buyer meet for the very first time. What do I mean? It is all about chemistry. It is like a date that will hopefully lead to a second and third date and hopefully more dates. During this romantic or honeymoon phase, the two parties get to one another and both sides learn how to agree to disagree and all of the other nuances that most relationship have. In my opinion this one to one personal and yes professional relationship is the key to a smooth sale and thereby a smooth transition. One of my many metaphors to both my Sellers and to my Buyers is the metaphor of a marriage. I tell them that I would ideally like them to stay "married" for at least a year or so after the sale is consummated, pun intended. Here is my rationale, things are certain to arise after the sale is made. A letter from the Franchise Tax Board, a call from the city regarding the business license, a referral source who is confused as to the ownership change and so on. To ensure a smooth transition, the best formula is ensuring that both parties realize at least two things. On the seller's side, that the business sale should ideally lead to a prosperous venture for the buyer and to ensure this goodwill the seller should be as understanding and supportive as possible. It is all about karma! On the buyer's side, purchasing this new business comes with it a lot of unknowns and a certain level of risk. The buyer needs to understand that they need the seller to be there to help with the learning curve. I do understand that the transition will entail a lot of logistics as stated in Joe Ranieri's and in Christina Lazuric's comments, but again, in my opinion, the transition will flow a lot easier with everyone on board to include a competent agent leading the way.
All good points Joe. In addition I would say that, although different brokers have different styles, my way to handle the transfer of the business regarding employees is to not say anything to anyone until the deal is close to closing. Once it's close to the end I suggest holding a mandatory staff meeting for all the employees, thanking them for their service and introducing them to the new buyer right there and then. This gives the buyer the a chance to introduce him/her self right away before they get any strange ideas in their head about the new buyer.

Buyers have to sympathize with how the employees must feel when they get a new boss. They have no idea what is going to change and if they still even have a job after the transition. The best thing you can do as the new owner is to assure them that their positions are secure and there service is valued. The first pep talk is crucial in setting the tone for who you are and what the new regime will look like. It's your opportunity to let them see that you are going to be investing in growing the business and they're assistance will be more important than ever. Also, growing the company could create opportunities for advancement that haven't been there before. Now instead of dreading the new ownership they are excited at the new possibilities.

All good points Joe. In addition I would say that, although different brokers have different styles, my way to handle the transfer of the business regarding employees is to not say anything to anyone until the deal is close to closing. Once it's close to the end I suggest holding a mandatory staff meeting for all the employees, thanking them for their service and introducing them to the new buyer right there and then. This gives the buyer the a chance to introduce him/her self right away before they get any strange ideas in their head about the new buyer.

Buyers have to sympathize with how the employees must feel when they get a new boss. They have no idea what is going to change and if they still even have a job after the transition. The best thing you can do as the new owner is to assure them that their positions are secure and there service is valued. The first pep talk is crucial in setting the tone for who you are and what the new regime will look like. It's your opportunity to let them see that you are going to be investing in growing the business and they're assistance will be more important than ever. Also, growing the company could create opportunities for advancement that haven't been there before. Now instead of dreading the new ownership they are excited at the new possibilities.

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