Why do some business transitions succeed while other perform poorly or fail? To answer this question, BDC studied nearly 200 small and medium-sized companies where a change of ownership occurred.
BDC found that a change of ownership is a moment of profound change in the life of a business. Whether buying or selling, entrepreneurs need to carefully plan a change of ownership with the help of experienced advisors.
6 Key Findings from BDC’s Change of Ownership Study
Transitions by Insiders Tend to Perform Better
Transitions involving family members or an internal management buyout tend to perform better than acquisitions by outside parties. This likely because new insider owners benefit from long-standing relationships and company knowledge.
A Change of Ownership Puts Pressure on a Company’s Finances
Financing a change of ownership often leads to an increase in a company’s debt and a corresponding decrease in profitability due to higher debt servicing costs. This new reality, combined with a tendency to underestimate the costs of a transition, can lead to a liquidity crisis.
Good Due Diligence Leads to Good Transitions
New owners were more likely to have a successful transition when they’d taken a hard look at the business strengths, weaknesses, opportunities and threats before investing. They were also more likely to have sought outside advice.
Forecasts Need to be Conservative
Few businesses achieved projected financials results in the first year following a transaction. Therefore, entrepreneurs should be conservative in forecasting how their new business will perform and, in turn, how much money will be available to service the company’s post-transaction debt.
Synergies Are Harder to Achieve Than Planned
BDC found, in many cases, synergies expected by new owners failed to materialize after the transaction. When they did, it was seldom in the expected time frame, or to the extent anticipated by the new owners.
The New Management Team is the Foundation of Future Success
We found that the management team is the driving force in a successful or failed transaction. The make-up of that management team is extremely important. Successful managers have the courage to make difficult decisions in response to changing conditions.
Remember, if you are buying or selling a business or franchise, it’s a big deal! Like we always say, make sure you have your acquisition team:
- Legal – Lawyer
- Tax – Accountant
- Financing – Banker
- Matchmaker – BizON 😉
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