Many business owners believe they have plenty of time to start thinking about a successful transition from their business. But, unfortunately, most of the time, they are wrong.
Most commonly, owners think they can wait until the last minute before they start to plan for their transition or exit. In the meantime, the business will transform into whatever they need them to be: whether that means bigger, more valuable, or more easily sold/transferred.
And while each business is different and each owner has different goals, one thing is clear: it would be best if you started your transition planning much earlier than you think.
Early planning benefits
Beginning your planning long before you intend to leave your business often gives you the flexibility to choose strategies that can greatly influence the way the business is grown, managed, valued, and eventually transitioned.
For example, identifying future acquirers early on allows you to study and envisage your business from the acquirer’s viewpoint. What makes your business unique and stand out from other competitors in the market? Why would it be attractive and valuable to acquirers? You can then tailor your business by developing the relevant value drivers to enhance these identified qualities of uniqueness, attractiveness, and, ultimately, value to future acquirers.
Business transition planning helps you work on these value drivers today so that you can reap the rewards immediately. It could be benefits such as reducing the owner’s dependence in the business, increasing customer numbers, developing new recurring revenue streams, or systemising the operations to make everything more streamlined. All of these will add value to your business not just in the future but also today.
The same concept is true if you hope to transfer your business to family members or employees. You’ll likely need to determine whether your targeted successors can successfully run the business, along with whether they are even interested in ownership. You may need to construct plans to keep key employees with the company as and after you exit it. You’ll probably want to determine how long it will take for your successors—who are unlikely to have much money—to cash you out for your share of ownership.
If you wait only until you are ready to exit the business to figure these things out, you may not give yourself enough time to address any issues your business may have. This can prolong the time you’re in your business, which can lead to poor performance or burnout. There are many things to consider, but we recommend a three-step process.
Step 1 - Set your goals
Setting your goals long before you’re ready to implement plans gives you a target to aim at. It’s like a ship with a destination.
Two of the most important goals are financial security and knowing what you want to do after leaving the business.
Unless you know what it will take for you to leave your business and never have to work again (unless you choose to), all of the other details surrounding your planning become moot.
Once you’ve determined how much you’ll need to achieve financial security and what motivates you to get out of bed every day, you can then decide when you’d like to leave the business, how much money you want (not need) after you leave, and to whom you’d like to leave it (e.g., an outside third party or an inside management team).
Step 2 - Account for your assets
Knowing what assets you currently have makes it much easier to determine what you will eventually need.
Consider accounting for all of your assets, including the value of your business and any non-business assets. Many owners have a general idea about their assets, but when planning for future success, general ideas often aren’t precise enough.
Accounting for your assets with precision allows you to close any gaps between your assets and those you need.
If you wait only until you’re ready to implement plans to start accounting for your assets, you may prolong the planning process beyond your wishes or find it difficult to achieve your goals.
Step 3 - Develop your value drivers
Value drivers are things that increase the value of your business to an objective buyer.
For example, regardless of whether you intend to sell your business to a third party or transfer it to an insider (e.g., family), the new owner will likely expect your business to run smoothly without you. If it doesn’t, you may be expected to stay in your business until it can run without you.
One value driver that can address this threat is a next-level management team. A next-level management team, by definition, allows the business to run smoothly without its owner.
Another important value driver is a documented process for sustaining cash flow. Documentation allows new owners, managers, and key employees to maintain the company’s profits after you’ve left. Without written and easily understood processes, cash flow can become a game of chance, and few buyers want to take chances when buying a business.
If you want to read more about value drivers, check out my blog, “How can FROGS drive up the value of your business?”.
Why now is the time
It’s a common misconception that owners think business transition planning should start when they are “ready” to sell or transfer their business.
In reality, if they want to squeeze out the maximum value for their business, crystalize the effort of their life’s work, and be ready for an enjoyable and happy next phase of their life, then business transition principles should be included in each and every business plan.
If transition planning hasn’t been part of your business planning to date, there is no time like the present to start.
Your wealth, freedom and happiness await!
The information contained in this article is general in nature and is not legal, tax or financial advice. Contact a lawyer or a tax or financial professional for information regarding your particular situation. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. Clients should consult their legal, accounting, tax or financial professional in specific cases. This article is not intended to give advice or represent our firm as qualified to advise on all areas of professional services. Master Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice you need.
Any examples provided are for illustrative purposes only. Examples may include fictitious names and may not represent any particular person or entity. This article has been sourced from a licence agreement with Business Enterprise Institute, Inc.
