Planning and Staging a Company for Transition

What You Need to Know When Creating a Business Transition Plan

Laverne was at the country club talking with Shirley. She was surprised to learn that Shirley just sold her distribution company for $10 million. Laverne knew about Shirley’s business because it was a competitor. Shirley’s company was an ordinary but steadily profitable operation. Its product line, historical sales, and earnings were almost identical to Laverne’s business. Both businesses were in a highly competitive industry with plenty of room for growth and innovation, and in line to become higher-valued companies.

What is the $6 Million Difference?

Laverne also wanted to retire and sell her company. However, upon discovering her business’s enterprise value was only $4 million, she was shocked to discover that Shirley’s business was worth so much more. How is it that these two companies were valued at such different amounts?

Shirley explained that she worked with an advisor and her management team to develop a comprehensive strategy for how the company would capitalize on growth and value enhancement opportunities — long before the transition. Laverne realized this was the difference. Not only had Laverne not considered putting a plan together, but also continued to rely on existing customer relationships for growth.

Most Owners Are Ill-Prepared for a Business Transition

Most other business owners find themselves in the same situation as Laverne. More often than not, a business owner either does not have a plan for staging a company for transition, has one in their head only, or has not communicated their plan to stakeholders.

The negative effects of not having a written business transition plan can be significant, not only for business owners, but for their families, employees, customers, and suppliers. The drawbacks of not having a plan can be compounded by significant competition in an anticipated ‘buyer’s market,’ as droves of business owners between the ages of 50 and 75 look to exit or transition within the next five to 15 years. Having better-prepared competition will put significant pressure on the owner’s ability to move their business to the next owner — and receive the targeted value necessary to retire.

A business transition plan includes transfers between family members, sales to a third party, or transfers to members within a company. It is designed to help owners move away from a business when they are ready and on their terms while maximizing the after-tax dollars that remain in their pockets.

The Process of Business Transition Planning

Transition planning is not an event but a process. The most successful ones follow specific steps and reach milestones in a specific order. The following is a general approach to help increase a company’s value while creating a better business transition.

When staging a company for transition, a business owner must first understand the value of their company, and subsequently implement a plan to reach the company’s goal of maximizing the value of the business. This two-step approach is usually run by an outside expert or advisor.

In the Assessment Phase, the professional advisor conducts a valuation assessment. The advisor also works closely with management to explore the personal goals of every team player, most importantly, the owner. In the Implementation Phase, the advisor works with the owner and the management team to execute the recommendations suggested to increase and maximize the enterprise value of the business found in Phase One.

The Assessment Phase

Determining the value of the company is only the starting point. Just as importantly, the transitioning company should reflect on the activities that drive more value, and which drive less. This process starts with analyzing past and projected financial results. Next, the advisor should have a detailed discussion with the owner and management team about the quality of the organization.

Based on this analysis, the advisor and key players create a roadmap to maximizing value. This provides a basis for prioritizing and planning improvements to increase the company’s value. In other words, understand what the company has already accomplished and then enhance it. The second part of this phase is the personal goal exploration. A good exit planning advisor works with the owners’ financial planner. The advisor helps determine if there is a gap between what the business could generate for an owner now, and what it would need to make to meet their financial goals after a transition.

Many owners are so busy with their companies that they fail to reflect on personal goals and what they will endeavor to accomplish after the transition. At this early stage in the process, it’s important to establish a framework to capture personal goals — which we’ll refine in the next phase.

The Implementation Phase

The second phase includes a regular review of goals, implementation of recommendations, and other aspects of the transition. Every year — when financial statements are done, projections are updated, and recommendations are accomplished — the assessment must also be updated to account for this progress. With this in hand, owners and their trusted exit advisors can analyze the improvements in the business and its readiness for the desired transition.

During Phase Two, the exit advisor regularly revisits personal financial goals, how the transition will look, and what life looks like after it happens. Many owners may want to accelerate the process and just skip to the end. However, to make ‘life after’ obtainable according to the owner’s vision, it is important to have a solid foundation and framework in place first.

There will come a time when the strategic team chosen by the business owner has gone as far as possible to enhance value, accomplish personal goals, and establish the foundation for life after business ownership. After that, the owner’s goals are clear, and the team has everything needed to decide on how to execute the ultimate exit.

A by-product of the Implementation Phase is that it creates everything owners need for due diligence documentation. At this point, a decision is made with regards to the exit being a transition to a family member, a sale to a third party, or employees. Generally, having a third-party exit planning professional oversee a transition helps to achieve a successful closing.

Accountability, Increased Value, and a Successful Closing

Business owners can be so focused on day-to-day operations that they do not plan for a time when the company lives without them — and vice versa. Following a planned process can increase a company’s value before a transition, and help owners acquire what they want after that occurs. Trusting the process and an experienced, independent advisor can create fertile ground for return on investment and increased dividends to everyone involved.

We think you’ll also like:

1. How to Conduct Due Diligence Before Buying a Business
2. Breaking Up Is Hard to Do: Surviving a Business Divorce
3. Business Valuation Is More Art Than Science

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Understanding Risk Management Basics for Business Owners
2. Selecting the Right Valuation Expert
3. What’s it Worth? Valuing a Business for Sale

This is an updated version of an article originally published on October 29, 2021.]

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