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If you’re headed for a transition, ensure you have an exit strategy

Years ago, I attended a seminar titled, “Successful Business Transitions.” One participant raised his hand and asked, “Isn’t that an oxymoron, successful transitions?”

The question has plagued me for years.

As a certified public accountant, I have been involved in many mergers, acquisitions, family sales, management buyouts and other “business transitions.” Unfortunately, most of them have not been “successful.” More than 75 percent of business owners say they regretted selling their companies a year after the sale, according to “Whose Business is it Anyway,” a PriceWaterhouseCoopers study.

Fortunately, there is an emerging group of professionals and advisers focused on preparing business owners and their businesses so that they might enjoy that elusive “successful business transition.”

Many advisers are trying to gain the knowledge and expertise to advise entrepreneurs on exit planning because the demographic wave has made it almost impossible to ignore. A national study by Exit Planning Institute and PNC Wealth Management Advisors suggests that baby boomers own 63 percent of all businesses and that 50 percent of baby boomers who own business plan to exit in the next five years and 75 percent plan to exit within 10 years. Eighty percent of those entrepreneurs have 90 percent or more of their net worth tied up in their businesses.

Clearly, the number of businesses and the amount of wealth to be transferred cannot be ignored, especially by trusted advisers (attorneys, CPAs, etc.) who help entrepreneurs and their families plan for and seize opportunities in the marketplace.

There are many ways to transition a business. All too often, the chosen method is to turn off the lights and leave the building. However, other options include:

■ Selling to an outside investor;

■ Selling to a competitor or what is referred to as a strategic buyer;

■ Selling or giving the business to a family member or a member or members of the management team.

Determining the best transition for a business is a matter of serious thought, research and counsel. A key deciding factor is how that method will affect the family and other important individuals. You and your advisers should examine this question as you consider transition options.

As you plan your transition, you should focus on maximizing your business’s value. Think of it like selling a home: when homeowners prepare to sell a home, they often repaint, recarpet and make over the house. Sometimes these efforts can boost the selling price or they may make the home more salable. Either way, they make the home more enjoyable to live in.

In the same way, there are many things sellers can do to make their businesses more presentable and appealing to a buyer.

First, be sure the company is set up to provide a rich business database that creates value for the buyer.

Ask yourself:

■ What type of management structure will bring the greatest value?

■ How does innovation affect a buyer’s feelings, and therefore price?

■ What kind of accounting system and reporting exists within the business and how will that affect a prospective buyer’s decision?

Fifty percent of transitions occur unexpectedly, because of death, illness or other uncontrollable events. Business must be prepared to transition in less than ideal circumstances. The “face-lift” mentioned above is a good idea for every business anytime, not just during transitions.

Exit planning not only makes transitions easier, it will “derisk” and improve a business’s value and the entrepreneur’s experience. It requires a broad based cross-disciplinary cooperative approach. Trusted business advisers must begin now to help business owners prepare for a transition that will come.

And come it must, sooner or later.

Leland D. Pace is a senior partner with Stewart, Archibald &Barney, LLP. He has been with the firm since 1979, and is a CPA with decades of experience in tax and audit. His main focus is on planning and creating opportunities by coaching clients. Reach him at lpace@sabcpa.com.

 

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