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Improve the pre-transition value of your business

As we discuss the importance of transition planning, business owners tend to invest more time in planning for a trip than planning for their business’s transition. Why is this? The short answer is that it is easier for owners to focus on the “here and now” than to plan for future changes to their organization. In fact, less than 15 percent of business owners have a plan for their business transition, even though more than half of them plan to transition in the next three-to- five years. How do they begin?

This is a major life event for many business owners, and it is critical to have a plan in place to ensure the business and the people thrive post-transition. Developing this plan takes time, and an optimum outcome involves assistance from experts in business transitions to navigate the steps and address three major segments of the process: transfer motives, transfer channels and transfer methods.

For transfer motives, the business owner must first understand their personal and business goals, as these will determine the direction of the other segments. There are several aspects of transfer motives, including short-term strategic thinking (next two-to five-years) the level of their continued involvement with the business, their view of their business legacy, areas of interest outside the business, the financial realities after the transition of the business, and all of the stakeholders affected by the transition.

Transfer channels are the second segment of a business transition and address whether the business owner would like to transition internally to either family or key employees, or externally via a sale or similar transaction. A critical element of this process that provides baseline information for decisions is the completion of a business assessment. This includes a valuation of the business and evaluates business readiness and attractiveness.

Transfer methods are the steps taken once the channel has been identified and are relevant regardless of which channel is selected. The timeframe and preparation for the transition are primary drivers of the tasks in this phase. A shorter timeline limits the ability to implement value enhancement items and narrows the scope and time involved in completing critical tasks for the transition. A longer runway allows time to develop effective leaders, document and implement systems and procedures, and to work a strategic plan to increase value. A current buy/sell agreement, communication regarding the transition, a review of tax implications, an analysis of a gap in transfer value and personal assets for life after transition, and options for financing alternatives are all a part of this phase.

Communication and a focus on value are key in any transition and especially impactful in the early stages of a transition. While there is not a perfect time to inform others of the intended transition, a plan should be developed and aligned with the transition timeline. Key stakeholders are often informed of the transition at the start of the planning process, where employees, suppliers and customers are often brought in once the plan has been confirmed and initiated to minimize the ripple effect and avoid the sharing of inaccurate information. This may often include the offering of specific benefits provided to employees to remain engaged throughout the process. However, regardless of the who and when, it is important to connect with everyone directly and follow up throughout the transition.

Business owners put extensive effort into running their business. When they take the time to plan for their future, they create control of the timing, options and method of their transition. A strong plan and the help of experienced professionals will navigate owners and stakeholders through the maze of difficult decisions and will optimize their chosen outcome. The result is a business that captures value for the successor and creates the opportunity for transitioning owners to be well prepared for their next chapter.

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