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Ten Tips for Developing a Transition Plan

Daily Journal of Commerce
February 6, 2015

Overview

There are many factors that can affect whether a business owner is successful in transitioning his or her business on the terms he or she wants – whether that be through a third-party sale, generational transfer, recapitalization, or sale to employees or management. Understanding and addressing these factors can sometimes involve a significant amount of work. By focusing on items that are most impactful, owners can move the needle forward more quickly.

Below are ten top tips that can focus your planning efforts in 2015, even if a transition is not imminent.

1. Condition your business to maximize value and salability. Value enhancement is driven by actions that "de-risk" the business from legal, regulatory, financial, economic and other variables. For example, putting a written "contingency plan" in place to document how core business functions will be performed if key personnel with institutional knowledge about the business are absent reduces the risk of a disruption in the business' operations.

2. Reduce dependency on ownership. A business with an experienced and trained management team is more valuable than one in which only the owners retain the key knowledge needed to manage the enterprise. Start by identifying those areas in the business that you don't trust anyone else to perform, and plan to make those functions replaceable.

3. Engage in tax planning early and often. Coordinating your estate plan and your business plan can save a significant amount in taxes. In the tax world, planning doesn't happen overnight. Some changes must be put in place years in advance before owners can realize the full benefits.

4. Know the risk factors and mitigate them. Be able to anticipate and explain the risk factors that a potential buyer will find in your business. Before you can address the risks, you have to know what they are. Conduct at least a cursory audit of your company's legal, financial and operational records well before a transition to evaluate where the gaps exist. Nothing is worse than having a buyer identify a major problem that the owners have overlooked. Once a seller loses credibility in due diligence, a buyer is likely to discount other aspects of the business.

5. Take care of key assets. Keep proper separation between personal and business assets. Value can be reduced if the business is reliant on assets or services held or provided by related parties. Often employees are the most important asset in a business. Take care of those employees, especially in the years and months leading up to a succession.

6. First impressions matter. If you intend to share information about the company with potential buyers, first impressions can make a world of difference. A company with complete and organized books and records will show much better than one that is disorganized. Think "curb appeal" – while some buyers can look past the mess, many more will wonder what deeper issues may be troubling the business.

7. Plan for family dynamics. Planning the succession of a business within the family requires a focused effort to prepare the successor, preserve family harmony, arrange for active communication, and consider dynamics both across and within generations (think baby boomers and millennials). What is "fair" among family members may not be best for the business.

8. Align interests with employees. Employees – particularly key managers – must be committed to preparing for and facilitating a succession. Without buy-in, employees are less likely to work hard to make a transition successful and even less likely to stay under new ownership. Ensure that key employees are incentivized to help the company grow and ‎ultimately achieve the transition. Do not underestimate the effect a change in company culture will have on employees.

9. Time can be your enemy. Closings typically get delayed because the parties are unprepared to meet contingencies or because unexpected risk factors arise through due diligence. Delays can signify erosion of the deal value. The better prepared the parties are in advance, the more likely a deal is to close on the sellers' terms.

10. Get the right team of advisers in place. You have to work on your business to position it for a successful transition. That requires the expertise of professionals such as attorneys, accountants, wealth advisers, insurance advisers, and sometimes consultants and family counselors. No business owner can do it all himself or herself while continuing to run the business successfully.

Use these tips as a starting point to put a succession plan in place (or refresh your existing plan) this year. While the process can seem overwhelming, in practical terms, a transition plan is really a way of running the business that maximizes its value and provides a means to achieve business and personal goals and facilitate financial security. That is something worth every business owner's time.

Matt Bisturis is an attorney with Schwabe, Williamson & Wyatt in its corporate, mergers and acquisition, real estate, and business transitions groups. Contact him at 360-905-1113 or mbisturis@schwabe.com.

As published, Daily Journal of Commerce, Febraury 6, 2015

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