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  • Five Vested Parties in Successful Hospitality Business Transitions

    May 10, 2022

    IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Oliver Kotelnikov. Mr. Kotelnikov is the Director of the Hospitality Transaction Division at IBA (www.ibainc.com):

    Five Vested Parties in Successful Hospitality Business Transitions

    Admit it, you’re blessed. The path of entrepreneurship is a gift, a lucky lottery ticket, and you can’t imagine being anyone other than a business owner. This humbling journey has opened many doors, created lasting relationships, provided an honest living on your own terms, and was a means of self-expression and creativity. Parts of the quest can be mapped and retraced. Other pieces of the puzzle are less quantifiable and only fit just so. An intuitive leap here, a split-second decision there, and countless seemingly chance encounters courtesy of the universal force known as luck all have changed the trajectory in untold ways. When it comes time to sell and exit, can you bottle the secret sauce of entrepreneurial success and pay your gift forward? As an experienced business broker facilitating numerous hospitality industry sales of family businesses and commercial real estate a year, I believe that successful transitions are a function of planning and foresight. Once agreement on the terms of the deal have been reached, buyer and seller must work together to secure the following five endorsements to ensure a smooth transfer of operations and a fluid transition at the helm.

    Customers

    In a hospitality industry company generating $3,000,000 in annual revenue with an average transaction of $100, the ongoing success of the enterprise depends on 30,000 individual decisions made by the customers. Established clientele, or the goodwill of the business, is a strong argument in support of purchasing a reputable going concern versus starting a new venture. The willingness of the clientele to continue patronizing the business is of utmost concern to buyer. Though a close association in the mind of the consumer between the business and its owner is common, it is ultimately the value proposition of the business that keeps customers coming back. The regular clientele will want to know that the successor has been thoughtfully selected and the foundational core values of the business will remain intact. With businesses generating significant recurring revenue through wholesale or contractual engagements, the customer list and any existing agreements will need to be handled with care.  A portion of the transition training period should be allocated to meeting and introducing the new owner to the client base. Promoting a social event or a happy hour gathering as way to thank the clientele for their support and publicly pass the baton can be an effective way to demonstrate continuity.

    Employees

    A business owner wears many hats but is unlikely to lead effectively or accomplish the executive task list without the support of a strong team. Employees are the backbone and the true brand ambassadors of the business. In order to retain the staff through the transition, ownership must pay close attention to company culture. Looking beyond the payroll reports, it is important to observe company traditions, celebrate important milestones and notable occasions, and follow accepted employee recognition practices. Strategically scheduled confidential meetings between a buyer and circle of key employees in the time period leading up to closing are not uncommon as a way of building rapport between the parties. An employee perspective on the business will always be different from that of the owner. Seeking the input of tenured staff members on matters of transition and day to day operations will not only build loyalty and help retain a knowledgeable team but is also a way for the new owner to learn about the business from a different vantage point.

    Vendors & Suppliers

    Seasoned vendor relationships are the operational support pillars of any business.  Sufficiency of inventory, logistics and delivery, and contingency plans in the event of a product shortage are all facilitated by knowledgeable sales representatives. A successful business owner will be on a first name basis with suppliers, know their communication preferences, honor payment arrangements, and will have the planned absences and vacations of their sales representatives marked on their calendars.  It is important to understand that vendor relationships are frequently more a matter of trust and rapport than contractual obligation. New ownership may not immediately be granted the latitude in order volume or terms of payment enjoyed by the old guard. These relationships will evolve and blossom over time as the parties get to know each other better.  A thoughtful transition plan will include handshake introductions with key vendors and seller’s explicit vote of confidence for the buyer.

    Landlord

    Most purchase and sale agreements are contingent on the successful assignment of the lease. In short, no lease no deal. The purchaser of the business must earn the confidence of a commercial landlord as perspective long-term tenant. The landlord will evaluate the tenants’ relevant industry experience, financial viability, credit report, and previous history of commercial occupancy. A landlord is not obligated to grant reassignment. Seller’s endorsement of the buyer as a handpicked successor to continue the legacy of the business will go a long way. A strategic meeting between the parties is commonly facilitated by the representing broker to make introductions and begin lease reassignment negotiations. Legally, a business broker should have a real estate license in the state of the business, if they are negotiating a new lease or lease assignment.  It is also beneficial to have a licensed real estate broker as your business broker if you are selling a business and real estate together, so one “cook” can be in the kitchen negotiating both asset sales.

    Lender

    The SBA flagship 7A and 504 loan programs remain a key source of funding for the acquisition of middle market privately held companies and the associated commercial real estate assets. In addition to evaluating the borrower’s financial qualifications and credit worthiness, the lender will also carefully assess the buyer’s ability to successfully operate the business. Direct relevant experience and a detailed transition plan are critical components of securing funding for the acquisition. Due diligence of the lender will assess customer and employee retention plans, lease security, vendor rapport, and the commitment of the buyer and the seller to work collaboratively to achieve a common goal. A business broker’s relationships in the lending community and knowledge of underwriting criteria and process is often fundamental to getting a deal financed.

    If you have questions relating to the content of this article, the process associated with selling a privately held company or family business, or establishing the market value for a privately held company or family business, Oliver Kotelnikov would welcome the opportunity to talk with you.  Mr. Kotelnikov can be reached at (425) 454-3052 or oliver@ibainc.com.

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.

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