A Division of New Hampshire Business Sales, Inc.

6 KEYS TO TRANSITION PLANNING

A careful process to increase your chances of success

John Howe, CEPA

Director, Business Transition Strategies

Have you ever thought about what you will do the day after leaving your business?

If you don’t already know, it means you should start thinking now… before you have to do it.

Venture capital firms and private equity groups almost never invest in a company without having a clearly defined exit plan in place first. That’s because they want a roadmap of where to take the business, and how they will know when it is right to move on to a new opportunity.

If you are the owner of a business, that probably means you should be thinking ahead too.

Golf great Gary Player was told that he always seemed to get the breaks and must be extremely lucky. He once observed, while hitting shot after shot out of a bunker, “The more I practice, the luckier I get.”

Developing a transition plan with a strategy to accomplish it won’t guarantee a happy future, but it will dramatically increase the likelihood that the future will be brighter and that it will be one you have in mind.

In fact, it is among the most important things you can do to invest in yourself and your business.

“Planning is Over-Rated”

Is it really?

Those who don’t consider the options and alternatives that lie ahead may find they have few options, and face being forced to take a less desirable alternative for themselves and their business.

You may be able to navigate your car to the destination without assistance of a road map or GPS device. But, you are more likely with them than without.

Planning sure beats the alternative.

As inventor Thomas Edison observed, “Good fortune is what happens when opportunity meets with planning.”

A transition plan is a comprehensive road map that addresses all of the business, personal, financial, and legal and tax issues involved in selling a privately owned business.

A good plan includes contingencies for illness, burnout, divorce, and even your death. Its purpose is to ensure the survival of the business; to provide continuity to your employees, customers, vendors; and to preserve wealth for your family.

Without a predetermined transition plan, you may very well:

Undervalue your company and leave hard earned wealth on the table,

Pay too much in taxes, and

Lose control over the process by being reactive, rather than proactive.

On the other hand, a well designed and implemented exit plan enables you to:

Control how and when you exit

Maximize company value in good times and bad

Minimize capital gains taxes

Ensure you achieve your business and personal goals,

Have strategic options from which to choose, and

Reduce uncertainty for your family and employees.

Six Key Components

Your plan should include these essential elements.

1) It should include a concise statement of your business goals, personal goals, and family/estate goals. This step is essential to ensure that all of the goals are consistent and set the direction for the rest of the analysis.

2) A transition plan should contain a detailed business valuation to establish a baseline market value for the business.

3) The plan should help you identify specific ways to enhance the value of the business as you prepare for your transition out of it.

4) A good plan should contain an analysis of the pros and cons of your different alternatives such as a third party sale, management buyout, family succession, or liquidation

5) A good plan should provide suggestions from qualified professionals regarding potential tax consequences.

6) The analysis should contain an action plan that details specific personal and business steps you must take in order to prepare for your transition.

Some people can accomplish all of these working on their own. They are disciplined enough to march through the process, top to bottom, and document everything for future reference. However, most need the help of a transition professional, which is one of the roles groups like Business Transition Strategies provide.

Multi-Discipline Approach

Perhaps the most important thing to remember is that developing a good transition plan is a multi-disciplinary endeavor. No single professional advisor has all of the expertise needed. The best plans incorporate input from a team of advisors that includes:

A business attorney with related experience,

A financial advisor or wealth management professional who does planning work,

A tax specialist who is versed in the latest tax issues, an

An insurance professional, and

A business intermediary experienced in business sales and transfers.

Sticking to your plan is just as important as having one. You should meet with your advisors on a regular basis to ensure that crucial steps are being completed on schedule.

Nobody likes to pay unnecessary fees, but the cost of developing a good plan is usually tiny compared to the additional value received at the time of sale. After all, transitioning from your business is probably going to be the most important deal of your life time. Don’t just shoot from your hip.

Your transition plan should be focused on two main objectives; 1) maximizing your company’s value, and 2) ensuring that you accomplish all of your business and personal objectives.

John Howe, CEPA, is director of Business Transition Strategies, a division of N.H. Business Sales, Inc. He is a certified transition planning advisor and business intermediary, and draws on over 30 years of management experience in his work. He provides a range of advisory services for owners, from strategic planning to transition planning, and also coordinates the sale process for those ready for that “once in a lifetime liquidity event.”

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A practical four-step process for planning your transition

John Howe, CEPA

Owners often put off thinking about how they will transition from their businesses to retirement or a different career.

This is natural, considering how much must be done day to day to keep their business running and succeeding. But ignoring the question does not make it go away. The bottom line is, at some point, the owner must consider how and when to leave their business.

Paul Simon, in his famous song about relationships, suggested there are 50 ways to make a change.

But for a business owner, the options are far more limited. The earlier you start, the more alternatives you have.

Here's a brief summary. 

1. Sell to an outside third party;
2. Sell your business to partners or other shareholders;
3. Sell or give your company to a family member;
4. Sell your business to one or more key employees;
5. Sell to your employees (ESOP);
6. Bring in an outside investor and keep a minority interest;
7. Hire a management team to take over and become a passive owner; or
8. Liquidate.

Determining exactly which option is right for you is a challenge that many business owners put off until it is too late.  Opportunities pass with time.  If you wish to "leave your business on your terms and on your time table," you need to be proactive about understanding your transition options.

We recommend that you follow a four-step process to determine which option is best for you. This process will ensure that your options are consistent with your personal goals and take into account the realities of your company and the marketplace. 

Choosing a Path

Step One: Set Personal Goals.

You need to identify your most important objectives; both in terms of financial goals ("How much money do I need from the exit to ensure my family’s financial security?") and in terms of non-financial goals ("I want the company to stay in my family," or "I want my key employees to be rewarded during the exit").  Establishing well defined and written objectives is the first step.  Doing so in advance of your transition gives you and your advisors the time necessary to make your goals a reality.

Step Two: Make Sure Goals are Consistent. 

With the help of your advisors you need to determine whether your goals are consistent with each other.  Very often this is not the case.  For example, many business owners want to receive all cash at closing when they sell or transfer their business.  This may not be realistic in today’s economic climate where many lenders require owners to have “skin in the game” even after the sale to a successor entity. An owner who wants to transfer the business to a family member or a key employee faces other challenges.  Family members and key employees often do not have sufficient capital to structure a transaction this way.  A great deal of stress and heartache can be avoided by addressing these issues early in the process.

Step Three:  Understand Value and Salability Issues.

Once you have defined a set of consistent objectives, you need to understand the market value and salability of your company.  This analysis is important in that it will provide you with further direction and can eliminate certain transition options.

For example, if the value of your company is below what you feel you need to support a comfortable lifestyle after your exit, you may decide to take some time to enhance the value of your business or to do further financial planning to ensure you clearly understand your needs.

In addition to understanding the value of your company you also need to understand how salable your business is.  Value and salability are not always the same.  Salability determines how quickly a business will sell and how much leverage a business owner will have when negotiating with a buyer.  Salability depends to a large extent on external market conditions.  External conditions are things that are out of your direct control like business, market or financial conditions.  For example, the option of selling your business for cash to an outside buyer may be eliminated because of a downturn in your business or industry. 

By working with a firm like Business Transition Strategies, you can get a better understanding of the value and salability of your company.  Groups like BTS are actively talking with buyers. Those who work with sellers and buyers can give you an accurate read of the marketplace and a "real world" sense of the value and salability of your company.

Step Four: Understand Tax and Legal Implications.

The final step in determining the best transition path for you is to evaluate the tax and legal consequences of the options that are available to you.  This evaluation should include factors such as legal structure of your business entity, how its ownership is structured, exiting legal agreements, as well as any changes that must be made.  For example, if a transaction involves a sale of assets and the company is a "C" corporation, there could be significant adverse tax consequences.  Getting input from your advisors can provide you options to consider.

Using this four-step process, you will be able to narrow the list of transition routes to determine which one is best for you.  The important thing is to start as early as possible, but remember that it is never too late to begin.

When you are ready, give us a call for a confidential preliminary meeting.

John Howe, CEPA, is director of Business Transition Strategies, a division of N.H. Business Sales, Inc. He is a certified transition planning advisor and business intermediary, and draws on over 30 years of management experience in his work. He provides a range of advisory services for owners, from strategic planning to transition planning, and also coordinates the sale process for those ready for that “once in a lifetime liquidity event.”

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