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Planning and Staging a Company for Transition

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

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 wouldn’t support her lifestyle throughout her retirement.  She was shocked to discover Shirley’s business was worth so much more!

Laverne asked Shirley what he had done to prepare her company for sale. Shirley explained that she 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. Generally, a business owner either does not have a plan for staging a company for transition, only has one in her head, or hasn’t communicated her plan to stakeholders.

The negative impact of not having a written transition plan is staggering—not only for business owners, but their families, employees, customers and suppliers.  This is compounded by the number of owners between the ages of 50 and 75, who expect to exit or transition a business in the next five to 15 years.  This will put significant pressure on the 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’s designed to help owners to move away from a business on their own terms—not those dictated by someone else—while maximizing the after-tax dollars that remain in their pocket.

Transition planning is not an event but a process. The most successful ones follow very 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 an owner must understand the value of the company, then implement a plan to reach the company’s goal of maximizing the value of the business as the owner marches towards exit or transition.  Typically, this two-step approach is 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 each 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 important, we explore how the company rates on what activities typically 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 gives 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 owners now, and what they would need to meet their personal 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 or want to do 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 is updated to account for this progress.  With this in hand, owners and the trusted exit advisor 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 life after it happens. Many owners want to accelerate the process and just go to the end.  However, to make “life after” happen according to the owner’s vision, it’s 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.  Now the owners’ goals are clear and they have 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 happen easier and faster.  At this point a decision can be made to the form of the exit being a transition to a family member, sale to a third party or employees among others.  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 get what they want after that happens.  Trusting the process and an experienced, independent advisor can create fertile ground for return on investment and increased dividends to everyone involved.

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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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