CRE Owners: Sell or Lease Back? Full Decision Guide

Did you know that 33% of employees in an acquired companies leave within the first year after a sale? That’s almost three times the normal attrition rate of traditional hires. https://mitsloan.mit.edu/ideas-made-to-matter/your-acquired-hires-are-leaving-heres-why

These aren’t just statistics to digest, they’re warnings to take heed of. Without prepping your management team for a smooth exit following a sale of your business, the company you spent your blood, sweat and tears building will be at a higher risk of failure.

In this guide, we’ll walk you through an example management prep timeline that will give your team the best chance of success post-exit. Whether you're planning to sell your business in the next year or five, starting now is the difference between a smooth exit and mountains of problems.

Why Management Readiness Is a Key Predictor of Exit Success

When buyers look at your business, they aren’t just looking to purchase your revenue, they’re buying your team’s ability to sustain and grow that revenue over the following 3-5 years.

To give buyers more confidence in your team’s ability, you need to provide a management transition plan. That includes documenting key roles, responsibilities and standard operating procedures as well as providing a plan to keep key talent on through transition, a transition plan for you to help the new owners with the management team post-sale and a plan for continuity with real estate and any other assets your company owns.

Once these steps are complete, buyers will have much more confidence in the businesses ability to remain profitable and grow in their first years of ownership.

The Hidden Cost of Owner-Dependent Operations

One of the biggest red-flags for buyers when searching for businesses to invest in is an owner-dependent operation. Reports consistently show higher EBITDA multiples for companies with structured management teams compared to those that are mostly owner reliant. Further, 62% of mid-market deals see price cuts when the owner is the sole knowledge holder.

To avoid this “key person risk,” you need to build out a management team if you don’t have one and prepare them with as much internal knowledge as possible through documentation on key roles, responsibilities and standard operating procedures. Without a team who can prove they understand these parts of the business, you’re likely leaving a large amount in valuation on the table.

Preparing for How Buyers Evaluate Your Team

Buyers use a standardized management scorecard during due diligence, which you can prepare your management team for. Here’s what you need to look out for:

1. Org chart clarity – Reviewing business structure is critical for buyers and shows that your team is laid out in the most efficient way possible. This is your chance to organize your company in the most impressive way for new owners.
2. Retention incentives – Since more than 33% of talent leaves within the first year after a sale, you need to come up with a plan to keep key talent on board. One strategy is significant bonuses paid 12 months after close.
3. Non-compete strength – Retaining key management pieces is critical for sustained success, so consider writing 2-3 year non-competes and non-solicits for revenue-critical roles.
4. Cultural fit scoring – Prepare your team with a unified vision of the business post-sale. How can they fit into that vision and communicate that clearly with potential buyers?

Your Management Prep Timeline

If you are looking for a timeline on how to sell your business, the below outline will give you a quick look into the key moments and checkpoints within a 12-24 management prep timeline (remember, this is just an example, not a hard and fast rule).

• Assessment (First 2-4 months) – Take time to assess your company’s structure, do a leadership audit to make sure all key roles are filled and create a succession gap map, which shows the weak points of your business structure and how the new owners can prepare to build those areas up in the transition period.
• Role Clarity (Next 2-4 months) – Look at all key jobs and update their descriptions and responsibilities to make sure all areas of your business are covered. Create KPI dashboards that show what metrics are most important for your business and track them so the new ownership can know where to look for signs of business health.
• Incentive Lock-In (Next 2-4 months) – Create stay bonuses for key members of the team, create phantom equity (which gives employees a cash bonus tied to the company’s stock performance without giving any ownership of the company away) or offer any other kind of “golden handcuff” agreement that incentivizes key members to stay.
• Knowledge Transfer (Next 3-6 months) Record standard operating procedures (SOP) for key business tasks, prepare key vendors for ownership transfer and shadow management positions to make sure all the work done before has resulted in an efficient structure and process moving forward.
• Buyer Rehearsal (Last 3-6 months) Get ready for buyers by doing mock Q&As, compiling as much data as possible and simulating due-diligence.

7 Must-Have Roles for a Sellable Mid-Market Business

Filling or creating these seven key roles are critical to avoid the key person risk that tanks so many mid-market business sales.

1. Chief Operating Officer (or General Manager) – This role runs daily operations without owner input and delivers key, weekly KPI dashboards that the company’s decision making lives by.
2. Chief Financial Officer (or Controller) – Delivers clean, GAAP-compliant financials alongside 12 months of financial forecasting. Without someone with intimate knowledge of your company’s financial situation, messy books could result, which is a major factor in many deals falling apart.
3. Sales Leader (if applicable) – Someone in your company needs full knowledge of your CRM pipeline, contract templates and renewal schedules, ensuring that ownership transfer doesn’t lead to lost business.
4. HR/People Lead – This role will take the lead in designing retention packages and managing the succession plan, with a focus on decreasing the normal 33% attrition rate in year 1 after a sale.
5. Real Estate Manager (if applicable) – If your business has real estate assets, this role will oversee the leases, appraisals and renewal calendars.
6. IT/Digital Lead – In today’s digital-first age, you need someone who can ensure cybersecurity and manage your tech stack.
7. Transition Captain – This is an optional role, but really comes in handy during the transition period, providing the buyer with a single point of contact post-close should any questions or concerns arise.

As a business owner, planning for and considering the right time to sell your business is one of the most prudent steps you can take to secure your legacy and financial future. With an estimated 80% of businesses failing to sell after they hit the market, you need to make sure to take the right steps to set yourself up for success when the time to exit comes.

So, you’re probably asking yourself, “What is the "right way" to sell my business?” A process that we’ll outline below that aligns your personal goals, like retirement or legacy preservation, with financial readiness and capitalizing on optimal market conditions. By taking the time up front to go through audits, real estate appraisals (if applicable), and optimizing the structure of your business, you can transform into a "seller-ready" asset that will find the right buyer for the right price. For mid-market owners, this means addressing unique challenges such as complex assets, regulatory hurdles, and buyer financing.

So why does this take longer than you think? While the active selling phase might only take a few months, the full process we outline below allows for deliberate preparation, marketing, due diligence, and a seamless close which will preserve your legacy and protect your employees and the company culture you’ve worked so hard to build.

How Long Does It Take to Sell a Business Step by Step?

When it comes to getting the most out of your business, the more time to prepare, the better. This can help keep expectations for how long a sale will take in check and will provide you ample time to be thorough and get the most out of your sale. Each phase below has critical steps and processes to go through to stay on track:

Phase 1: Preparation and Valuation Phase

This initial phase is crucial, laying the groundwork for a successful sale. Cutting corners could prove costly by the time the sale reaches closing. Conducting thorough financial audits, real estate appraisals and preparing your business to be seller-ready by proactively answering all potential financial questions from buyers will set you up for success down the road. Once you go through all the financial exploration, you will be able to have an accurate and fair valuation for your business, which is often more than assumed because of real estate, market conditions and assets on hand. You can also use this time to demystify all the details of your business that you rarely think about, and address any regulatory hurdles you might have once your business is on the market.

Phase 2: Marketing and Buyer Outreach

Through partners like Transworld Business Advisors, you can reach buyer networks that are looking to buy businesses just like yours. Consulting these experts (business brokers) will help you showcase your business in its most appealing light and can help you find buyers you would have never found otherwise. Through a brokerage firm like Transworld Business Advisors, you can also speed up your selling timeline without sacrificing any quality because of the hours and expertise you pay for when they come on board.

Phase 3: Due Diligence and Negotiation

Once you find an interested buyer (or buyers), there’s a lot of work that still needs to be done. Mountains of documentation, review of financials and due diligence can suck up valuable resources and time from your operation, and industry data indicates that incomplete or inaccurate documentation contributes to approximately 40% of deals falling through, so having an advisor to help walk you through this step can ensure that you make it to the finish line. Either way, providing enough time for this stage is critical to avoid errors that can cause problems at closing.

Phase 4: Closing, Transition, and Post-Sale Support

Once the sale is complete, there’s still work to be done. Early exit planning should have included crafting a detailed transition plan, which now comes into play. This might involve staying on for a set period to ensure a smooth handover, train new owners and help maintain client relationships. If your deal includes real estate components, this phase will also include property transfers and other complexities that need to have time allocated for.

Why Rushing a Business Sale Can Cost You Dearly

If you fail to go through these steps and rush to get your business on the market as soon as possible without going through the process to find the fair market value, you could be leaving hundreds of thousands of dollars on the table. Going through the process above includes calculating your seller’s discretionary earnings (SDE), which are calculated from the last 12 months of financial statements for your company. Taking your time can help you identify large, one-time expenses that can be added to your net income as “add-backs.” Since your purchase price will likely be calculated based on a multiple of your SDE, ensuring this number is as high as possible is critical to maximizing your profit.

4 Common Mistakes to Avoid When Planning to Sell Your Business

1. Incorrectly valuing assets

Overvaluing or undervaluing your business or your assets can derail the sale process from the start. If you overvalue your business, serious buyers could be scared off and your selling timeline could be extended more than you were prepared for, which can cause more costs as the months drag on with no progress. Undervaluing your business due to lack of preparation means you could leave money on the table when closing day comes. To make sure you get the right valuation, work with certified business valuators who can consider market trends, asset deprecation and buyer demand in your market and community.

2. Poor documentation

Inadequate or unorganized documentation can be a deal-breaker, especially for the most serious buyers on the market. Incomplete financials can also raise red flags for buyers, while missing documentation on real estate, contracts or compliance can grind the process to a standstill and threaten the chance of a sale at all. Make sure you have all of the needed documentation to prove your business ownership, years of financials records and everything needed to show legal compliance in order to keep your sale timeline on track.

3. Skipping exit planning

Without a formal plan created in the first phase of your sale journey (or before), business owners are more likely to make emotional decisions and lose out on value they would otherwise get through a sale. A major part of exit planning is preparing your business for a sale, which is a process that can boost the value of your business through financial cleanups, customer diversification or real estate enhancements.

4. Choosing the wrong broker

Without a broker that knows your industry and your market, you are risking missing out on maximum profit and dealing with a mismatched buyer pool. At Prospere Companies, our mid-market business brokers leveraged targeted networks, decades of experience navigating unforeseen hurdles, and refined skills with marketing your business to reach the right buyer for you. Choosing a firm like Prospere Companies, with proven expertise in real estate-integrated exits, aligns your sale with the right audience, maximizes efficiency, and avoids the pitfalls of a generic approach.

The Role of a Trusted Business Brokerage in Mid-Market Exits

If the thought of navigating the complexities of selling your business feels overwhelming, you're absolutely on the right track. At Prospere Companies, we have businesses like Transworld Business Advisors, Transworld Commercial Real Estate and Exit Factor that specialize in business brokerage, mid-market business sales, real estate-integrated deals, and comprehensive exit planning.

If you're thinking of selling your business, partnering with a business brokerage like ours can be a game-changer. We handle the details that might be beyond your expertise, including meticulous documentation preparation, accurate business valuations, marketing and confidentiality.