Only one third of privately owned businesses successfully move through transition to new ownership. While most owners have a vision for life after business the majority don’t have a plan in place to realise it.

When you consider that a good proportion of an owner’s wealth is often tied up in the value of their business, maximising that value makes a lot of sense. But to get there you need a plan – more aptly, a formal transition plan.

There are only two types of transition: A planned or voluntary transition with a timed and orderly exit from the business. Or the alternative – an unplanned or involuntary transition arising from a death, disability or some incapacitating event.

When should you start planning for transition? It’s never too early. Don’t put it off until you’re thinking about retiring or selling, because depending on your personal financial situation and the quality of life you desire after business, it can take years to get all the pieces in place.

Like any form of wealth creation, the more time you have to build your assets the more wealth you can accumulate. The same principles apply to your business; you should focus on building the value of the business so that when you are ready to transition out, you can fully monetize your asset.

A realistic view of wealth created from owning a business is that it comes from two sources, these being the annual earnings of the business (profit or loss) and the value of the business when it is sold. Many business owners hang in with less than satisfactory earnings year in year out on the assumption that one day they will sell out for a pot of gold. The graph below displays this assumed scenario diagrammatically. However, this may not be so and transition planning deals with ensuring that over the life of business ownership the maximum value is extracted. Typically this means maximum value on exit but it may also mean that a more tax effective way is to extract value in the years leading up to exit.

A transition plan should be a priority for every privately owned business, but unfortunately, the statistics show that it’s not. The vast majority of privately owned businesses in the United States, Canada, the United Kingdom and Australia do not have a transition plan.

There is another reason to get serious about transition, and it’s a recent phenomenon. We are entering a new watershed in business, and professional associations around the world are sounding the warning sirens. As the baby boomer generation moves into retirement, there will be many more sellers than there will be buyers for privately owned businesses. And everyone knows what happens to prices when there are fewer buyers than sellers.

The maximum business value can be realized when a buyer can clearly see that the business can operate successfully, independently of the owner and can continue to generate earnings into the future. To achieve maximum value from a transition it is important to develop a strategic plan that ensures profitability.

This makes it appropriate to mention the important role your key people must play in any transition. You will need to mentor and develop those people in the business who manage the daily operational activities. Devoting enough time to successfully replacing yourself at this level minimizes the business risk, compared with introducing a successor immediately after the transition is completed.

We define ‘succession’ as turning over the responsibilities previously handled by the owner to an individual with the vision and managerial talent required to take the business to the next level. A concentrated effort must be employed to build the business prosperously, not only up to transition, but also beyond the transition date and into the foreseeable future under the new ownership.

It should come as no surprise that there is “success” in “succession, yet many owners do not know how to achieve it. We define it when three conditions are met:

1. It occurs at the time of the owner’s choosing.
2. It occurs in accordance with the owner’s wishes for the future ownership of the business.
3. It occurs with a value that is satisfactory to the owner in conjunction with his/her wealth objectives

The elements of a transition plan which lead to success must therefore include:

	your transitional objectives
	your current personal position
	the strategic and operational position of the business
	the optimal way to exit the business
	tax, legal and commercial considerations
	an implementation plan
	a people development plan
	a self management plan to prepare you for a major life change

It doesn’t matter if you’re considering an exit in one year or five years, developing and implementing a transition plan will help your business grow, increasing both annual returns and business value on exit. All indications are that buyers will pay more for a business that has a formal Transition Plan.

The journey to successful transition is the final business achievement for many business owners and there are many complex issues to consider along the way.

The transition plan is the first step in an orderly transition. Once you have a plan in place you must implement it which means grooming the business for sale. We call this Managing For Transition. And finally once you are fully prepared there is the actual sale, which we describe as Transaction Management.

In future editions we shall look at the next two steps in this final chapter of your role with your business and what you need to do to make this a crowning achievement.