Creating Business Growth and a Successful Transition
“Important Steps in the Process”
Stephen L. Ferraro, CPA/ABV/CFF, CEBC, MAFF, CVA
Danny J. Wheeler, CPA
Running a privately held business is a huge challenge. On a daily basis, owners are confronted with a countless series of interdependent issues that require their decision-making abilities. One of these issues is the future ownership of the business by someone else. More succinctly stated, the issue is whether or not, you the owner of the business, are taking actions today with the decisions that are being made in the business that will increase or decrease the likelihood of having success in finding someone else who will be able to run your business in the future.
Owners who are thinking about the future and are asking the question “who will own my business next?” need to consider two (2) very important questions in preparation for a future transition. The first question is “Is My Company Transferable? The next question is “how do I go about Creating A Successful Transition?” This article provides an overview of steps that owners can take in the transition process. It is written with the intention of having you think through the transferability of your business and what decisions you can make today that will make your business easier to transition to a new owner in the future. The following steps can assist you in the transition process:
- Adopt an Ongoing Process and a Growth and Transition Planning Mindset
- Measure and Manage your Company’s Owner Dependence
- Assess Your Current Management and Support Team
- Understand and Evaluate Your Industry Transfer Statistics
- Understand Your Profitability and Relative Business Value
- Address Your Personal Value Gap and Business Growth
Recent Studies Show that 80% of Owners are ‘Stay and Grow’
The reason that FAZ Strategic Advisors are focused on business growth and the steps involved in Creating a Successful Transition is because in a recent, national, survey conducted by Pinnacle Equity Solutions, approximately 80% of business owner respondents indicated that they are not ready to leave/exit their businesses.
In short, business owners across America are mostly categorized as “Stay and Grow” owners – which means that they want to stay with the business (i.e. not exit) and they are pre-disposed towards learning about the process of Growing and Creating a Successful Transition in lieu of simply exiting the business today. As such, we present a comprehensive process for your review and consideration for your own business.
Adopt an Ongoing Process and Growth and Transition Planning Mindset
A key to Business Growth and Creating a Successful Transition is to adopt an ongoing planning process and a mindset towards taking action in this direction. An ongoing planning process is one that helps owners understand their goals, measures their readiness to meet those goals, continually maximizes the value of their business and then discovers the best transfer option and relative business valuation that will produce the most successful transition for each individual owner. Every owner and every company are different in their goals. The most important part of an ongoing process is that an owner gains clarity around what they want to achieve and begins to think through the manner in which they are going to achieve that goal.
When you commit to an ongoing process, you will begin to develop a growth and transition planning mindset. This simply means that the planning process is an educational process that assists each owner in considering not only what is going to happen in the future, but also what each owner can do today to begin to make that vision a reality.
Measure and Manage Your Company’s Owner Dependence
Another fundamental in Creating a Successful Transition is to measure and manage the amount of dependence that your company has on you. A transferable business is one that can be owned and run by someone other than you (and/or your partners) today. Many privately held business owners can’t transition their businesses because they are indispensable to the successful running of the company. So, a primary key is measuring and managing your level of involvement in the running of your business.
Issues to consider include:
- Who makes major decisions?
- Are systems established so the business runs independent of your individual efforts?
- Is there a reliable and empowered management and support team in place?
The answers to these questions will begin to help you see the amount of dependence that your business has on your personal involvement. And, if that dependence is high, then, all things being equal, your company many not be transferable to someone else.
Assess Your Current Management and Support Team
Another objective in Creating a Successful Transition is the evaluation of your current management team. The quality and depth of your management team goes hand-in-glove with your owner dependence ranking.
Are you an owner who has hired and empowered managers with key roles in your company? Or are you an owner who sees the hiring of managers as an expensive exercise that has failed in the past and you’ve concluded that it is easier, cheaper and more personally profitable for you to do the heavy lifting yourself?
You can transition your business when you have the right people in the right places, along with incentive plans to keep them focused on achieving successful results for the company.
Understand and Evaluate Your Industry Transfer Statistics
A critical step in Creating a Successful Transition is gaining an understanding of how businesses typically transfer ownership in your industry. You see, you can develop a transition mindset, reduce your company dependency on you and hire great managers but this does not necessarily mean that your company is transferable. Until someone is identified as having the financial and business acumen to run your company, it may not be transferable. And, if you are in an outdated industry, you may have a tough time finding investors (or, at some level individuals) who are interested in entering your space.
Knowing how companies in your industry transfer will not only answer the question of whether or not there is demand for your business, it will also point you in the direction of understanding the value that you may receive for your business.
Understand Your Profitability and Relative Business Value
Along the line of industry statistics, do you understand the profitability of your company relative to others that are in the same business as you? After all, it is profitability that drives value in a business transfer. The key is knowing whether or not your profit margins and overall company performance is above or below market expectations.
A company that has profit margins below others in your industry may be difficult to transfer at the price you desire. If an investor or a future owner sizes up your company versus another and your profit margins are lower than the others, then that buyer is likely to purchase your competitor’s business instead of yours. Of course, the opposite is true of companies that have superior profits.
Addressing Your Personal Value Gap and Business Growth
There is a logical answer to the question “how much value increase do I need?” The short answer is that you need enough of an increase in the value so that, upon transfer of the business to someone else, you are able to have enough after-tax money to meet your personal financial goals.
This “Value Gap” calculation is an important part of the transition planning process, as well as adopting a transition mindset. Once we know this number, we can help you increase the value of your business both through increased profitability, as well as through a reduction in the riskiness of your business.
Creating a Successful Transition is a topic that many business owners have a natural interest in learning more about. We hope that this article helps to provide a roadmap for understanding some core components of having a transferable business and gets you thinking about analyzing your company to understand whether or not your business is actually transferable to someone else and which areas you need to improve to meet your personal goals.