By Maurie Cashman
Many business owners ask me about a timeline for how long it takes to complete an ownership transition plan. The plan itself may take less than a year to design. But executing that plan so that you transition on your terms- with the financial resources to achieve whatever other goals you’ve established–takes far more time than most owners expect.
“Don’t wait until conditions are perfect to begin. Beginning makes conditions perfect.†– Alan Cohen, writer and motivational speaker
To achieve your goals, you must begin planning and executing a strategy to transition ownership well before you are ready to leave. Otherwise, it’s unlikely that the business will be ready to transfer when you are ready to leave.
- Every owner defines “transitioning on their terms” differently, however that definition typically includes:
- Having the amount of cash they want;
- Picking the owners they wish to transition ownership to;
- Having a post-transition life plan; and
- Achieving the value-based goals they want their businesses to accomplish.
Every one of these transition goals takes time to achieve. Once you understand how long each will take to accomplish you will know how soon to start your journey to your transition.
How long will it take you to transition your business? Each owner will have a different timeline, but there are some time-consuming tasks common to all transitions.
Establish your transition plan. Timeframe: 90 days to one year. It is possible to create a transition plan in 90 days but most good plans require almost a year to design. Owners need time to consider alternatives, and many issues will arise when they move through a transition planning process.
Close the gap. Timeframe: Depends on amount of growth in value needed, but often five to ten years. There is likely a gap between the value you need to receive for your ownership interest and the value you are likely to receive if you transfer the business today. The time it takes to close that value gap depends on:
How much growth is necessary?
What is a realistic growth rate for your business in today’s economy?
How much capital (financial and resources) is available to achieve the necessary growth?
What is the estimated growth rate of your non-business investment assets?
The time required to close the value gap is the unknown factor in estimating when you will be able to leave your business on your terms. The best way to achieve sustainable growth is to create a written business plan with accountability and timelines as part of your transition plan.
Many owners are in denial when it comes to objectively quantifying the size of the value gap, and exactly how they are going to close it within their timeframe. The reason behind this denial of a large gap is that most owners have no plan to close it other than work harder. Owners often don’t know how to build sustainable value at the pace necessary to achieve financial independence.
Business Owners Will Face Stiff Competition
The overall business climate has change dramatically in the past few years. As we went through the great recession, many owners lost a significant amount of equity in their businesses. As a result, many are attempting to earn back that equity by continuing in their business longer than they had anticipated. This will almost inevitably lead to an increased supply of businesses attempting to transition ownership over the next five to ten years. And if you learned nothing else in Econ 101 it is that supply and demand will attempt to reach an equilibrium by adjusting value downward if supply exceeds demand.
“When do you anticipate transferring the ownership of your company?â€
Anticipation of Ownership Transfer
Look closely at this chart. It indicates that 67% of business owners surveyed are planning some sort of ownership transfer in the next 10 years! That is an astounding number, but it makes sense because so many of the country’s small business owners are baby boomers.
Tax planning and implementation. Timeframe: Three to ten years. Minimizing taxes is a part of any plan to achieve maximum value for a business. Planning can not only minimize or even eliminate taxation upon the transfer of ownership interest, it can save future taxes. Some tax-saving strategies (such as converting your business from a “C”, or regular, corporation to an “S” corporation) take as long as ten years to fully implement. Others take just a few years, eg. changing your residency to another state to avoid state income taxes on the transfer of your ownership interest. If you leave tax planning until the end, you are likely to pay more in taxes than you would have to with proper planning.
Transferring your business to children or employees. Timeframe: Three to ten years. It is possible to transfer your ownership to a child or to an employee by transferring ownership in exchange for a promissory note. This is a form of financial suicide. If you wish to transfer ownership to children or management and achieve your goals, you need time to:
- Grow business value and cash flow. As growth occurs, you benefit from increasing distributions of business income that you can shift into non-business investments;
- Develop the management and ownership skills of the incoming owners;
- Begin a well-designed transfer of small amounts of non-voting ownership to children or key employees based on their achievement of pre-set performance standards;
- Transfer the balance of your ownership interest for cash after the incoming ownership has acquired sufficient equity to borrow money to pay for the remaining ownership.
During this time, you retain full control of the business.
Sell your business to an outside third party. Time frame: One year to…? Assuming your transaction advisor determines that you are likely to receive the money you want from the sale of your business, your last step before beginning the sale process is to engage in pre-sale planning. This involves having your advisors review the structure and operations of your company to discover and remedy any issues that might impact the sale process.
These include potential lawsuits, disgruntled minority owners, and inventory accounting discrepancies. All of these can derail the sales process. Time kills deals. You don’t want correctable problems to cause delay and the pre-sale planning process helps to prevent this. Pre-sale planning takes only a few months, but correcting any problems that are discovered can take much more time. Once remediation is completed, the sale process begins and is usually complete within a year. Many owners discount the value of this process. I always tell client that the buyer will find these things and they may be significant to a buyer, even if the owner does not think that they are. It can be very helpful to have a transition advisor who can look at your business objectively through the eyes of a buyer.
Summary
Every owner’s transition timeframe depends upon both an owner’s goals and the readiness of the business. Few businesses are prepared for transfer due to controllable business factors and uncontrollable, but manageable, economic conditions. Lack of preparation make accurately estimating your departure date more difficult than ever.
Almost all owners today are ready to transition their businesses before their businesses are prepared to fetch the value and other goals owners seek. If the time before the business can be transferred drags out for years after owner feels ready to exit, they face burnout, frustration and lose interest in the business.
It takes a lot longer to build adequate transferable value than it does to decide you are ready to transition. The best plan is to ensure that the business is ready to be transitioned when you are ready to leave.
© 2016 Aspen Grove Investments, Inc.