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Financial Poise
Business Transition and Exit Planning

Planning and Staging a Company for Transition

What You Need to Know

Laverne was at the country club talking with Shirley, a new member. Laverne was surprised to learn that Shirley had just sold her distribution company for $10 million. Laverne knew about her 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 but expanding industry with plenty of room for growth and innovation, and in line to ultimately become higher valued companies.

A $6 Million Difference

Laverne also wanted to sell her company and retire. However, she discovered her business’s enterprise value was $4 million, which would not support her lifestyle throughout her retirement. She was shocked to discover Shirley’s business was worth so much more!

Laverne asked Shirley what she had done to prepare her company for sale. Shirley explained that she had worked with an advisor and her management team to develop a comprehensive written 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, she 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. More often than not, sadly, a business owner either does not have a plan for staging a company for transition, has one in her head only, or has not communicated her plan to stakeholders.

The negative impact of not having a written transition plan can be deeply impactful—not only for business owners, but for their families, employees, customers and suppliers. The drawbacks of not having a plan will 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 (potentially better prepared) competition will put significant pressure on the owner’s ability to move a business to the next owner — and receive the targeted value necessary to retire.

A 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 to move away from a business when they are ready and on their own terms, while maximizing the after-tax dollars that remain in their pockets.

The Process of 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. Here is a general approach that helps 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 her company, and subsequently implement a plan to reach the company’s goal of maximizing the value of the business. In most cases, this two-step approach is run by an outside expert or advisor.

In the Assessment Phase the professional advisor conducts a valuation assessment. At this time, the advisor also works closely with management to explore the personal goals of every team player, including, and most importantly, the owner. In the Implementation Phase, the advisor works with ownership 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, in this article, we explore how the company attempting to transition rates on what activities drive the value of every business. 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 have been 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 is 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, as well as the trusted exit advisor are able to 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 life 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 owners’ goals are clear, and the team has everything needed to make an educated decision 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, generally making the post-sale reality easier and faster. At this point, a decision is made with regards to the exit being a transition to a family member, 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.

[Editor’s Note: Interested in a webinar to learn more about this topic? Try “Transition and Exit Planning: Planning and Executing a Sale & Other Exit Strategies”. This is an updated version of an article that was originally published on April 3, 2015. Read more about Business Transition and Exit Planning.]

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About H. Barry Goodman

Barry is a strategic Certified Public Accountant that provides business advisory services to entrepreneurs and owners of closely held privately owned businesses for over 30 years. Barry also started, built and sold my own firm, so I understand what it’s like to be a business owner. He started and built his own CPA firm and…

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