Beginning to Plan
Transition Planning begins by taking the “8 Key Steps”
Assess your Business Value and Level of Transferability
Assess Your Financial Resources
Conduct the Organizational and Legal Audit
Implement the Business Continuity Plan
Create the Governance
Vest Your Key
Prepare Yourself, Your Family and Key Employees
After identifying your Universal Goals and Objectives (UGOs), it’s time to analyze your business’s current market value and level of Transferability.
The first step is to determine your business’s current “Fair Market” and “Enterprise” value and to conduct an analysis of its current “free cash flow”. These financial indicators tell us your company’s current monetary value for internal and external transfers, available capital for growth and investment and how much future value can likely be created by implementing the key Value Drivers.
From there, we assess your company’s level of Transferable Value to determine how “sellable or transferable” the business is and how easy it will be for your successor to continue growing the business. This metric also determines who is likely to be your ideal or best successor.
Given your UGOs, we’ll also need to determine the value of your personal financial resources (outside of the business) to determine the extent of your “financial or wealth gap”…the difference between the total amount of money you’ll need to sustain your desired lifestyle after retirement and the total value of your liquid assets (outside of the business). It’s mission critical to know the real value of your current financial resources, and the extent of your wealth gap, to determine how much money you’ll need from your business when you decide to transition.
Preparing the business to transition also includes addressing your company’s organizational and legal risks, potential tax consequences, proprietary protections, internal and external agreements and other foreseeable threats and opportunities. Owners and stakeholders also need to evaluate and update their personal estate plans to ensure their future family needs are addressed and protected in the event of an unexpected and untimely death or circumstance prior to completing the transition planning process.
Before beginning your transition process, it’s critical that you have a documented Business Continuity Plan (BCP) which details how the business will be managed and the current ownership will be transferred in the event something happens to you or the current key employees (death, disability, divorce or withdrawal). The BCP will reflect the current management structure to ensure that all operational tasks are properly handled by your current key employees, and determine what happens to the owner’s ownership interests if they decide to leave the business, become deceased or permanently disabled or breach their fiduciary obligations owed to the company or other owners. The BCP needs to be reviewed and updated annually, or as needed, to ensure stability and security for the business and future successor.
It’s also important that you and your successor managers establish a governance structure to ensure that the current leaders, managers and vested key employees understand the company’s annual KPIs (Key Performance Indicators), their roles and responsibilities, standards of performance and how and to whom they are to be held accountable for achieving the KPIs. The governance structure is the “blue-print” for how each business function will perform and contribute to increasing the business’s Transferable Value..
A company’s key employees are its most valuable asset when it comes to selling or transitioning the business. All buyers and successors will rely on the expertise, motivation and creativity of your key employees to increase the company’s Transferable Value after you have transitioned out of the business.
As a result, identifying, vesting and retaining your key employees and future successor management team is your top priority to obtain the required level of Transferable Value. The goal is to motivate, develop and reward your key employees to ensure that they remain committed to your organization and its future successors.
Selling or transitioning your business is a highly emotional experience which requires all of your mental and emotional energy and the “buy-in” of your family members and key employees. As a result, it’s critical that you understand and address everyone’s “concerns, fears or potential hang-ups” related to leaving or transitioning the business.
In addition to understanding everyone’s personal issues and concerns, it’s also important that you include your immediate family members and key employees in the transition planning process to allow them to voice their preferences and desired outcomes. We’ve learned that the “emotional or personal considerations” related to selling or transitioning a business tend to have the greatest impact if not addressed up front.
Lastly, it’s critical to identify and assemble your “Transition Team”. The team should consist of all owners, current key employees and external advisors (CPA, transaction and estate attorney, HR consultant, lender and insurance or risk manager). The team should be led by a “business transition advisor” who has extensive knowledge and experience with your type of business transition. The team should work together to help you undertake all of the necessary “de-risking” and “value building” strategies and to ensure that your UGOs are accomplished.