Business Transition Planning: Keys to a Successful Exit

This article originally published Jan. 7, 2019, was updated to reflect economic and market conditions.

As the demographics of our society continue to change, the business world faces challenges unlike any others our economy has had to deal with in the past.

The aging workforce, the labor shortage in some industries and increased life expectancy are all causing people to work beyond the traditional retirement age. Further, companies seeking to remain competitive in the global economy must balance their output requirements with work arrangements that appeal to workers’ preferences for flexibility.

On top of that, middle market companies have their own unique challenges. At the forefront is how the owners of many successful owner-managed businesses will exit and transition the organizations that they spent years building and making into successful enterprises.

Getting started is the first challenge

As owners get their financial house in order for a transition, they face no shortage of issues and questions. For example, is their estate plan structured properly? Do they have the entity organized properly to minimize taxes? On a personal level, are they financially secure and emotionally ready to handle a transition?

Perhaps the biggest obstacle for owners, managers and their families, though, is how to start the succession process without being overwhelmed by the tasks ahead.

All too frequently, we see business owners do nothing—they freeze up. One common example is an owner who has built their successful organization through hard work, guile and personal capital, making huge sacrifices to achieve what feels like a monument to personal accomplishment. Due to this hard work and achievement, the entrepreneur wishes for time to stand still, take a breath and contemplate retirement and next steps.

Nevertheless, time marches on. The smartest entrepreneurs understand that businesses are built to be sold. Whether it is selling to an outside buyer, selling to management or transferring to the next generation in the family, planning for that final event should be part of a company’s natural progression. Rather than being avoided or ignored, succession and exit planning should be embraced and addressed in a thoughtful and forthright fashion.

Business owners will succeed in their business transition, and find satisfaction in it, through these four steps

Those are the keys to a transition achieved on an owners’ terms rather than resulting from an outside, unforeseen circumstance, such as a sudden health issue.

Having an exit strategy, and understanding its many facets, is key

Transition planning is like typical operational strategic planning, a process familiar to many leaders. Developing a strategy for the business and the business owners is paramount. As with strategic planning, succession and exit planning involves leadership and owners determining where the enterprise should be headed and the tactics needed to get there.

Preparation is always key. A starting point is learning the advantages and disadvantages of each option and strategy and analyzing the implications for various stakeholders. Next steps include researching the potential value of the enterprise, and then determining ways to enhance that value in the eyes of potential acquirers. Researching recent transactions in the industry is also critical.

Evaluating the current management team’s effectiveness, passion and importance to the transition stage is also key. If family members are involved in the business, evaluating their readiness to take control of the enterprise is critical. In a family-run business, the family dynamics are often fraught with very sensitive issues. If not addressed thoughtfully and delicately, these dynamics can undermine the ability of the organization and its owners to make progress toward the desired changes.

A key area often given insufficient focus is planning for the owners’ future—not necessarily their financial future, but their personal goals.

Dispassionately evaluating whether the owner(s) should separate themselves from the business—and either have the next generation take the reins or monetize the business—seems like a natural and inevitable step. However, given many owners’ emotional attachment to their business, such discussions and planning can be difficult and cloud the overall planning process.

Owners need to keep in mind that they control the ultimate implementation of any planning process—which is why the exit strategy should be discussed sooner rather than later. After all, sometimes events do not happen on the expected timetable. Preparing for an inevitable event is just smart business.

A sound plan consists of many moving parts. We strongly recommend creating an action plan or roadmap that details the necessary tasks, embeds deadlines and assigns responsibilities.

Just like with strategic planning, it is often valuable to engage an outside consultant, coach or facilitator to guide the transition planning process and hold the business owners accountable. In addition, a team of professional trusted advisors can help execute parts of the plan.

Smart planning leads to a smooth exit

The lifecycle of an enterprise consists of several critical stages: startup, growth, maturity and exit. Business leadership must carefully prepare for and execute each stage so that the enterprise can move from one to the next while avoiding retrenchment.

Business transition planning paves the way for the exit—the critical final stage in that journey. If transition planning and implementation are done right, this stage could be one of the most rewarding aspects of being an entrepreneur.

This article was originally published on RSMUS.