transition plan resized 600

What is an ownership transition plan?

An ownership transition plan is a written and comprehensive document that outlines how and when the ownership of a business will be transferred to others, either internally or externally, in order to achieve the owner’s goals.

Why plan in advance for the transition? 

Simply put, planning in advance will allow you to positively affect the outcome.  Preparing for ownership transitions takes time.  Specifically, a plan will allow you to:

  1. Ensure that your goals are met
  2. Determine how much growth will be necessary to meet your financial goals
  3. Maximize the value of your business
  4. Groom others to assume leadership positions
  5. Protect both business & personal wealth that is accumulating as you grow
  6. Determine which options are likely to meet your goals
  7. React to unsolicited offers appropriately
  8. Act when the time is right for going to market
  9. Minimize taxes

1.  Owner Goals

Owners typically have both personal financial goals as well as non-financial goals when they transition the ownership of their business to others, whether to an internal or external buyer.  It is important for each shareholder to determine how much money they will need from the sale of the business to maintain their lifestyle and carry out their activities in the next phase of life.  Financial independence and retirement are not necessarily the goals of every owner as they exit.  If there are multiple shareholders in the business, the shareholders goals should be discussed and aligned before a strategy is fully developed.

Examples of non-financial exit goals include:

  • “taking care of” loyal management and/or employees who helped grow the business
  • providing for family members that may or may not be active in the business
  • continued involvement in the business by the shareholders
  • spending more time on activities outside of business

2.  Company Growth Plan

Once their goals are defined, it will be easier for owners to determine the amount of growth that will be necessary in order to meet those goals.  This is a very important “number” to know.  Growing privately held companies is always risky and there are many factors beyond the owners’ control but owners need to know how much growth is enough to meet their needs.  In addition, most owners are approached by buyers long before they plan to exit (see #6 below).

3.  Maximize Company Value

Beauty is in the eye of the buyer and buyers are looking for profitability, sustainability and transferability in their acquisition targets.  Sustainable companies that can continue to function without the original owners are less risky and more transferable.  It will be important for owners to take a close look at every area of their company (i.e. pre-due diligence) from a buyer’s perspective to ensure that they are maximizing company value.

4.  Groom Others to Assume Leadership Positions

It will be necessary to groom key employees to run the company without the original owners whether those key employees plan to buy the company or not.  Finding and grooming others will take time.  Owners should let go of operational responsibilities and delegate them to others and also consider formal leadership training to successfully develop strong leaders within the company.

5.  Protect Business and Personal Wealth as You Grow

Every privately held company has inherent risks.  As companies grow, so do the risks of losing the ever-increasing company value!  Owners should have a plan to minimize and mitigate both personal and business risk.

Examples of wealth preservation strategies include:

  • proper asset titling/ownership
  • having the right kind and level of insurance coverage for the company and shareholders
  • wealth diversification outside the business for the owner
  • strategic estate planning
  • properly funded and well written shareholder/partner agreement
  • executive compensation plans to entice management to stay on beyond the exit

6.  Transition Options

Once the shareholder goals are quantified, it will be possible to examine different options, both internal and external to determine the pros and cons of each and how well they match up with both the financial and non-financial goals.  Internal options include management or family buyouts and employee stock ownership plans while external options may include different types of buyers and investors in the marketplace, what they are looking for and how much they would be likely to pay for the company.

7.  React to Unsolicited Offers

As their businesses grow, owners will receive both routine as well as serious inquiries from potential buyers.  If they have created an exit strategy, it will enable them to determine the appropriate course of action for these unsolicited inquiries so that they are handled quickly and effectively without a misstep.  Many owners become enamored with these types of inquiries and often give out important information that should only be released by their advisors to certain prospective buyers that fit the criteria as outlined in the exit strategy.  This inevitably puts owners in a compromised negotiating position.

8.   Act When the Time is Right   

Creating an ownership transition strategy will allow owners to “pull the trigger” when market conditions are most favorable.  Many owners think they will exit their business when they reach a certain growth milestone or a certain age.  The reality is that the market for business sales and acquisitions runs in cycles and it is possible that it will be a seller’s market when the owner reaches his goal or his target age.  There are many factors, beyond the owner’s control, such as economic cycles, elections and government actions that impact the market and determine whether it is a favorable time to sell.  It sometimes takes 3 to 5 years to prepare for an exit if the owner wants to achieve his goals.

9.  Minimize Taxes

Many owners are unfamiliar with how business sales, both internal and external, are structured and taxed.  The type of sale (asset or stock) and the company’s entity structure are the two main drivers for determining tax treatment.  If planning is done in advance, actions may be taken to minimize both corporate as well as personal taxes (income and estate) which can net the owners significantly higher proceeds than they would have otherwise received.  Being knowledgeable also enables the owners to more effectively evaluate any offers they receive for the company and negotiate the sale more successfully.  Many buyers assume the sellers are unaware of the tax treatment and try to take advantage of this situation to the owner’s detriment.

10. Find Peace of Mind

Developing an ownership transition plan not only provides owners with the roadmap they need to achieve their own goals, but it also can provide hope and a plan for the next generation of company leaders. It can also help a business owner avoid seller’s remorse, or disappointments related to the sale of business. This can be avoided with our process of holistic, comprehensive, specialized planning and the assistance of seasoned advisors. The next phase of life can be what owners envision, a life filled with excitement and the fulfillment of lifelong dreams and goals.