Posts filed under Transition Planning

10 Steps to a Successful Business Transition

Joan M. Gruber Ridley, CEPA, CBI, CFP®

Suppose you were thinking about transitioning out of your business in the next few months, or even three years from now.   Would you know where or how to start the process?  Most business owners would say “no” or “I don’t know.”  As a result, businesses with between 50% and 80% of all privately held businesses that are in play, fail to sell or go to closing.  With a sound plan, your chances of a successful transition are greatly increased, regardless of whether you wish to transfer the business to family, employees, management, or to a third party.

Most business transitions fail due to any number of reasons including:

  • unrealistic price and terms
  • business-owner’s personal lack of preparation
  • inappropriate exit strategy
  • due diligence surprises
  • the business’s lack of preparation
  • inappropriate transition team
  • inadequate post-transition planning
  • poor timing

With proper planning, these issues can be addressed and the chances of a successful transition greatly increased.

Pre-Transition Phase

Start the process with a business check-up that examines all aspects of the enterprise.  The result is a clear picture of what issues need to be addressed to improve the value of the business.  These are addressed in the next step where value improvement is the goal.  This process includes the identification of current value before the improvement process begins.  On-going testing and various measurements to chart the increase in value demonstrate the results of the strategic plan that has been implemented.  At this point, personal financial planning is recommended to determine what your post-transition financial needs will be. Be sure to include your need for capital to make gifts to family and to the community.  It would make little sense to proceed with a transition strategy only to find out after the fact that the net proceeds after tax and fees are not enough to support the lifestyle you envision.  

If family succession is an option, this phase should also include a family business counselor who can offer invaluable insight into the likelihood that the proposed successor, management team, and employees can work well together to achieve the company’s goals while maintaining healthy, balanced family dynamics.  

At this point you are ready to examine all of your transition options.  There are at least three dozen.  While some will be eliminated early in the analysis, others will require detailed financial and tax calculations to determine which one is right for you.  This study also should take into consideration your personal needs, goals, resources, and values.  The final step of this phase is to identify the transition strategy you wish to implement.  This step includes a primer on the jargon, roles of the various players, types of buyers, deal structure, and other aspects of the process so that you are well-informed about what to expect.  

Transition Phase

Although there are only two major steps in this phase of the process, it could take as long as the entire first phase to complete.  Once you have identified and committed to the transition strategy you wish to pursue, the next step is to identify the team to implement it.  Look for advisors who are not only experienced and capable, but who are willing to work together for your benefit.

If you have chosen a family succession strategy, you might already have the team in place such as the estate planning attorney, your financial planner, and your CPA.  However, you might need to add a life insurance agent who specializes in sophisticated succession planning strategies, or other specialists to implement your plan if your current advisors do not have business transition as their area of expertise. Check with your existing advisors to be sure you are clear about their areas of expertise and to be certain that every team member is clear about his or her role in the process.  

If you have decided to transfer the company, or part of it, to your employees such as through an ESOP, then you will need an experienced team of advisors to carefully execute this complex process.  This process includes approximately 248 steps to complete.  It requires one professional who has completed many ESOPS to insure that all aspects have been perfectly executed.  If any step is overlooked or is improperly implemented, all of your tax benefits could be lost, and, you could be exposed to potential litigation down the road.

To implement a sale to an outside third party you will need to select a mergers and acquisitions (M&A) firm that will represent your company, identify a qualified purchaser(s), negotiate on your behalf, and close the deal.  Expect the M&A firm to have its own team, including transaction attorneys and CPAs to assist in the transaction, unless your own CPA and attorney have significant transaction experience.   Even if your existing advisors do not have significant experience with business transactions, there will still be an important role for them as your trusted advisors.

Post-Transition Phase

Once the transition is complete, there will be a period of time where some monitoring of the process is recommended.  If the business has been passed to another family member or to another generation, continue working with a family business counselor to insure that the lines of communication are open and that interaction between all involved is running smoothly.  He or she might establish a family council to accomplish this.  If the business is sold to an outside third party, a change-management team might be brought in to insure a smooth transition.   Intense work with your personal financial advisor usually begins in this phase, although it would be wise to keep that person involved throughout every phase of the transition.     

Is This Process Necessary

No, it is not.  You might say that you have suitors calling everyday who express interest in buying your business, so why go through this process and spend the money? Because anyone who is pursuing you has his own agenda.  What is good for the other party might not be in your best interest.  Certainly, the other party does not aim to serve you.  When you retain the services we are describing, your goals, needs, resources, and values are the focal point.   And, you get to decide what strategy to pursue.  You also get to decide exactly when you and your business are ready to allow outside parties to examine your books and your operation. In addition, when one party pursues you, you are in the unattractive position of negotiating with one suitor at a time where the purchaser has no competition.  This puts you at a serious disadvantage if you have a desirable company.  

Whether you are selling to an outside third party or are transferring the business to family members or to employees, observing this process is still recommended.  The purpose of the process is to improve value and to integrate the affairs of the business with your own personal needs.  This process will accomplish that.   

You might find yourself in the unfortunate situation where you do not have the luxury of time to go through this process.  Perhaps the market is changing very rapidly so that an opportunity will be lost if you do not begin to transition the business now.  Or maybe you, as founder of the company, have become incapacitated or are facing an imminent demise and the company is in danger of losing value.  Or, perhaps you are burned out and need to transition out of the business quickly.  These could be sound reasons to omit the pre-transition phase.  However, you are likely to realize less after-tax proceeds.   The downside is that you or your family might not be as prepared psychologically or financially for the post-transition phase. And, your stress level might be elevated because you have not planned as carefully as you could have.  But, if you have 12 to 30 months to go through this process, you will be in control, and your chances of being totally pleased with the end result will be greatly increased.


Joan M. Ridley (CEPA, CBI, CFP™) is an author, speaker and President of Business Wealth Solutions, LLC. She leads design and implementation of strategies to help business owners exceed their goals before and after retirement. She has more than 30 years of experience advising business owners and managing their business and non-business wealth.   

Copyright 2015 Joan M. Ridley

Posted on January 20, 2016 and filed under Transition Planning.