Business Transition - Preparing for the Inevitable
Time after time, when we meet a potential new client or during ongoing discussions with existing clients, we ask the same question:
“Do you have any intention of selling your company at some point in the future?”
An alternative (and equally intrusive) question we also ask is:
“What are your plans for stepping back or fully retiring?”
Ironically, whether you’re looking to sell, step back, or retire, there are several foundational processes that every business owner should have in place. These processes not only increase the value of your business but also demonstrate that value to others when the time comes.
A Mindset of Preparedness
In May 2023, I wrote a blog on Succession – A Plan for all Seasons. In that muse, I outlined a number of considerations regarding succession planning.
In this blog, I want to outline several more macro considerations when dealing with the transition preparation, regardless of which transition avenue you decide to take.
Every business owner should keep the following questions in mind, combining planning for the eventual transition of their business and creating filters for decision-making:
“Will this decision today add to or take away from the value of my business when the time comes for transition?”
“Will this decision possibly increase or decrease the speed at which I can make this transition?”
Simple questions, but ones that should be asked regularly. Having recently completed negotiations on the sale of a large client company, I am reminded again of how much groundwork goes into preparing for such a transition and just how many of the key steps should be part of good business hygiene.
What Does “Transition” Really Mean?
Every business will face a transition at some point, yet we often think of it as simply a sale to some third party. However, the transition avenues might also include:
A sale to a competitor, consolidator, or private equity firm
A management or employee buyout
A transition to family members
A personal shift toward retirement or a reduced role, while retaining full or partial ownership.
Regardless of the avenue, our goal is always to help business owners reach the point where they have choices. And with choices comes freedom. That, in my opinion, is the Ultimate Goal.
Planning Ahead for Value and Speed
Let’s borrow a quick analogy: If you want to sell your car for the best possible value, you’ll clean it, maintain it, and prepare all the documents in advance. The same principles apply to selling or transitioning a business.
The two key outcomes we want are:
Value: Getting the best price and terms
Speed: Closing the transaction as quickly and smoothly as possible
With this preamble in mind, consider other actions and tactics executed as part of a strategic process rather than at the last minute. All are part of achieving both Value and Speed.
The suggestions should apply:
Initially, as simply excellent internal business management processes every owner should employ. A transition plan is not a required prerequisite to any of the suggestions below
If you are more into the recognition stage now and beginning to contemplate preparing the company and yourself for some kind of transition in the future, or
If a specific transition is being contemplated, whether you are preparing for a third-party sale or arriving at the Ultimate Goal, and now you want to exercise those freedom options.
Below are some suggestions that should form part of your plan from an internal management process perspective, which are the low-hanging and high-impact actions:
Organize Agreements and Contracts
Maintain an organized inventory of all contracts, both current and recently expired, including:
Customer contracts and master service agreements
Supplier, lender, and third-party agreements
Small leases (e.g., photocopiers, equipment)
Bank agreements and credit arrangements
Organize them logically (by entity, functional area, etc.), and track both current and expired agreements as well as all amendments. Ensure all documents are fully executed by both parties.
Good contract management is essential for risk mitigation, if nothing else. If the transition is a sale to a third party, expect that party to want to review all agreements. Good contract management done today reduces future stress and supports a faster closing.
2. Flag Change of Control & Non-Disclosure Clauses
Within your contracts and agreements, watch for clauses (especially customer, property and asset lease and loan agreements) that:
Require notifying the other party if you intend to sell the business
Require the other party’s consent to a sale
Restrict you from sharing agreements without permission
While only relevant if a change in control is contemplated, business owners should be aware that these clauses could exist in their agreements.
Depending on the number of agreements you have in place, getting them organized in the event of a sale to a third party, the notification and approval process can take time, so best to be prepared. You won’t need to notify the other party until a deal is in motion, but you should flag these clauses now to avoid scrambling later. The buyer will be very insistent on ensuring notifications and approvals are properly executed.
3. Keep Your Minute Books Updated
It is just good business practice to have your minute books updated, and it is a sign of good governance. Yet in private businesses, this is often not the case.
Make sure your lawyer and/or internal team:
Documents all shareholder minutes and resolutions, financial statements, annual filings, etc.
Updates the minute book annually
Conducts periodic reviews to ensure completeness and compliance
If a sale to a third party is contemplated, incomplete minute books can often cause delays and extra legal costs when all these updates now need to be done at once and covering perhaps many years.
4. Clear up Security Interests & Liens
If, in the normal course of business, your company has:
Bank loans
Credit cards
Mortgages
Supplier liens
We find that lenders and suppliers are quick to put security or liens in place, but often are quite slow in removing them (but most act quickly after being prompted). Good business practices dictate that security interests are not necessarily left in place longer than they should. Have your lawyer conduct a security/lien search every year or two and ensure prompt removal of outdated security and liens.
If a sale to a third party is contemplated, these claims may need to be discharged quickly before a transaction can close, and this is often a difficult area to maneuver at the last minute. Planning might avoid big complications later.
5. Nail Down Work in Progress (WIP)
If your company engages primarily in project-type work like manufacturing, construction, engineering, or software development, then there is a very good chance that you have WIP on your balance sheet, or you should have.
Ensure you:
Adhere to applicable financial reporting standards for revenue recognition
Use consistent, auditable WIP processes and calculations
Prepare WIP calculations monthly, not just at year-end
Improper accounting for WIP results in all kinds of ongoing monthly reporting issues, which can quickly become issues for your lenders.
If a sale to a third party is contemplated, the quality of the WIP accounting procedures and the accuracy of the results will be extremely important to that purchaser and its lenders. Poor WIP practices raise red flags and can reduce perceived business value. Do not take this lightly, as it is of extreme importance to the purchaser.
6. Track Property & Equipment
While it seems very logical to assume otherwise, it is a fact that many companies do not, or cannot, quickly create a proper schedule of property and equipment in a format that includes:
Asset categories
Dates acquired
Cost
Amortization
Disposals
Net book value of each
This information should be created and updated monthly by the company’s internal accountant, but is often done only at year-end by the external accountant, which is costly and unnecessary. This is one of the internal accountant’s many monthly responsibilities.
If a sale to a third party is contemplated, the purchaser will certainly ask for this schedule. It should be one of the easiest schedules to provide quickly, if maintained internally every month.
7. Maintain Equipment Lease Schedules
Just as noted above with property equipment, a clean schedule of all your leased assets, including:
Leased asset description
Lease start and end date
Cost
Amortization rate
Net book value
Payments and implied interest
Associated “Obligations under Capital Lease” schedule listing the remaining liability amounts for every leased asset noted above.
Again, it is recommended that the schedule be prepared by your internal accountant and updated monthly for any changes. This will reduce your reliance on your year-end accountant.
If a sale to a third party is contemplated, the purchaser will certainly ask for this schedule also. It should be another easy schedule to provide and thus reducing transition costs and stress.
8. Organize Property Leases
Keep a central file of all lease agreements and prepare a schedule for each lease, including:
Lessor
Legal address
Square footage
Monthly rent
Deposits
Start and end dates
Any lease amendments
Change of control/ notification clauses
Once again, it is recommended that the schedule be prepared and maintained by your internal accountant and updated monthly for any changes. This will reduce your reliance on your year-end accountant.
If a sale to a third party is contemplated, the purchaser would likely be assuming these obligations and therefore would want to review the agreements. Keeping a specific lease file and updating it on an ongoing basis would also reduce transition costs and stress.
In Summary
Private business owners enjoy a lot of flexibility. But to complete a successful transition, you need structure and planning. You have been able to do things in certain ways and may not have been pressured or obligated to change internal processes. However, if you decide to sell, activate another transition strategy, or retire, you will want optimal business processes. Doing so will ensure you leave the company in the best possible position for the new management team to continue to prosper.
Start building these processes now, not when you’re ready to exit. You’ll:
Enhance your company’s value
Streamline any sale or succession
Gain incredible clarity and control over your options
And most importantly, you’ll be working toward Value and Speed.
There is a whole array of strategies, tactics, and processes that might need to be employed to execute a successful transition. The above are some of my more recent considerations and thoughts that might make that transition smoother, as well as elevate some basic financial management processes in the process.
If you would like further information or would like to chat about these and any other matters surrounding the preparation of both yourself as an owner and your business for that inevitable transition, please don’t hesitate to call our office. We would really enjoy a conversation with you.