Moore on Manufacturing: Transition Planning

Many business owners are aware of how important transition planning is to the future of their business. What’s even more illuminating, however, is how this planning can help your business now.

On a recent episode of Moore on Manufacturing, JMCo partner Mike Sibley and director Carrie Boynton discussed transition planning with Heather Parbst, the director of transition services with the Velocity Advisory Group. Having sold her own business years ago, Heather provides valuable insight on the purpose, process and immediate benefits of transition planning.

What Exactly is Transition Planning?

Simply put, transition planning is exactly what it says: planning for a transition. At some point, you won’t be running your business. You might retire, or a sudden tragedy might leave you unable to steer the ship. Your transition plan outlines the procedures to change leadership once you step away.

But there’s more to it than simply naming someone to take over when you leave. Parbst likened transition planning to a three-legged stool:

  • Personal readiness – How prepared are you emotionally to exit your business and move on to the next thing in your life?
  • Financial readiness – Are you set up to achieve your long-term financial goals?
  • Business readiness – Is your business sustainable after you leave? Does its value transfer along with ownership?

The point, she explained, is to get the owner to a place where they have a choice in when and how they exit.

“Often you’ll get an owner who’s just lack of preparation or unforeseen circumstances… a disability or a divorce or something like that. And because they’ve been very focused on growing the business… they need to make a transition and they’re really stuck,” said Parbst. “They might not be able to sell at all and they have to shut the doors, or they’re not able to pull the value out of that organization when they really need it. So it is about getting them to a point where they have a choice at any stage of the game.”

Common Transition Planning Mistakes

One of the most frequent situations Parbst sees is owners who don’t give themselves enough time to execute their plan. She calls this “a lack of runway,” and it’s easy to see why. An airplane needs enough distance to take off or land safely. Likewise, transition to new ownership needs three to five years for all necessary steps to be executed successfully.

She also noted how business owners often have unrealistic expectations about the process or the money involved. “We have a tendency to see more value in the things that we love,” said Parbst. “Business owners and business are the same. You think you have more in it than you actually do.”

Parbst said this mistake is often linked to not having the right advisors at the table. “I’ve seen several situations where, instead of going to experts in the field that can really attest to the value of the organization, they might go to their personal financial planner—who tries to be helpful but might give them misleading information.”

A Firsthand Account

Parbst founded and ran her own IT consulting company business before selling it several years ago. The eye-opening experience gave her firsthand insight that she now passes along to clients.

“I had spent the last several years really learning how to grow the business, how to manage the people, how to build the team, all of these sorts of things,” she said. “But I had no idea what was involved in actually determining the value of a company or what the sale process was like.”

The overwhelming nature of these decisions was compounded by pressure to keep it secretive. If word got out too early that she was selling, competitors could take advantage and prey on her clients.

The key was to find a good advisor who understood her industry and business model. She also learned the role trust plays in working with that advisor. Many owners have a sizeable chunk of their personal wealth tied up into their business. When that business undergoes a sale, every aspect is scrutinized—including those personal finances.

“I was somewhat surprised at the level of emotions that it stirs up,” she explained. “I had a business partnership and so we were navigating all of that as well. So it was really an emotional experience for me. And having people on my advisory team that I trusted to air my dirty laundry was important.”

The Value of Proactive Planning (Hint: It’s Not Just a Better Transition Plan)

Parbst’s advisor did more than provide expertise and hold her hand through the emotional process. He also showed her how to add value to her business. While this results in a better price when the time comes to sell, it also provides benefits now in the form of increased efficiency, higher profits and more engaged employees.

“Business readiness and exit planning are really just good business strategy,” said Parbst. “You gain so much if you start earlier in the process. Because you’re building a strong foundation and framework by focusing on the areas that make it so much easier to scale and grow.”

Parbst says she generally focuses on up to seven value drivers with her clients, depending on their business type.

  • Financial health – Good cash flow, solid accounts payable/receivable processes, and a business owner who can understand financial statements and make healthy business decisions.
  • Strategic growth – An understanding of what the market demands, a plan to capture market share, and robust marketing efforts.
  • Infrastructure – Equipment (both what you have and its condition), IT infrastructure and platforms, and policies and procedures.
  • Leadership and people – Not only having the right people to make decisions and execute the work, but the training and management systems necessary to sustain them.
  • Customer capital – Do clients come back? Do you have any brand evangelists? This also covers client diversity; if 80% of your revenue comes from your top few clients, that means trouble if one stops patronizing your business.
  • Intentional culture – Are employees engaged, do people communicate, and is there emotional drama?

At the center of these six is what Parbst calls the most important value driver: ownership independence.

“You can have great financial health. You can have a great strategic growth plan. You can have the right wonderful leadership team in place,” she explained. “But if they’re all dependent on that owner to really be driving the organization, when that owner steps out… the organization’s not going to be as sustainable as it could be.”

Above All Else, To Thine Own Self Be… Happy

Another thing to remember is that a transition plan is a personal plan. While you’re valuing your business, selecting a successor and taking other steps, remember to make a plan for you. What will you do when you step down?

Parbst mentioned that 75% of business owners are unhappy one year after they sell. However, it’s not necessarily because they didn’t get enough money or the successor runs things differently. It often happens because the owner’s identity was so wrapped up in that business, they never thought about what comes next. So think about your personal goals and how you want to spend your post-transition time.

Whatever those goals are, get started sooner rather than later.

“I think strong business readiness and exit planning is good business strategy. So start as early as possible,” said Parbst. “Again, you need at least a three- to five-year runway to really get the value you out of an organization. But implementing those changes now is just going to increase the effectiveness, the efficiency, and the value across the board. So starting early and building a strong team of qualified quality advisors that you trust as soon as possible.”

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