What Every Business Owner Needs to Know About Transition Planning

Most business owners don’t begin to think seriously about business transition planning until the need presents itself. By that time, your business exit can feel like a scramble. You’re rushing to weigh your options, build your business transition plan, and assemble your transition team while trying to protect everything you’ve built as you prepare for the next chapter. Some advisors recommend starting your business transition plan the moment the business is established. Others say business owners need to begin planning at least 5 to 10 years before their intended departure. The truth is there’s no right time to engage in business transition planning, only the time that’s most right for you.

Whether you’re years away from stepping back or facing that decision now, understanding the essentials of business transition planning can save you a great deal of stress when the time comes. In other words, the more prepared you are, the more control you have over the outcome.

What is a business transition?

Business transition occurs when you step away from running the day-to-day operations of your business, whether that means handing over the reins to someone else, bringing in new leadership, or exiting the business entirely. While every business owner’s path is different, most business transitions fall into a few common categories:

• Selling the business to a new owner

• Passing the business down to a family member

• Closing the business and liquidating the assets

• Bringing on a partner who will take over leadership of the business

More often than not, your involvement with the business will end the moment the transition takes place. In some cases, you’ll remain involved in the business but in a reduced or advisory role while transition leadership and day-to-day management is facilitated by another person.

Business transitions can happen for two main reasons:

A desired transition is one that you plan, whether to create more personal wealth, gain time to pursue interests outside the business, or set up your family for success in the business. These business transitions allow you to leave on your own terms and establish a legacy that lasts.

A necessary business transition typically occurs when circumstances require a change. These circumstances could include a death in the family, a growing health concern, or significant financial issues. While these situations can’t always be avoided, having a transition plan in place helps to ensure the process is handled smoothly and with maximum financial benefit.

The more you understand your business transition options now, the more effectively you can navigate any of these scenarios and ensure the best possible outcome.

What does a robust business transition plan contain? Let’s take a close look at the four key elements your business transition plan should include.

1. Your Choice of Transition Scenario

For most people, this is a difficult exercise. When you’ve put so much time and effort into your business, it becomes very dear to you. Can somebody else carry this business forward? Would they even want to? The answer to both of these questions usually is yes. It may not be obvious at first, but there are a lot of great people out there who would love the opportunity to grow your business further.

Sometimes, the owner is so close to the business that she doesn’t see its value to someone else. Too many businesses simply close without ever going through the process of finding another owner. It’s the path of least resistance and the quickest way to exit. In this scenario, however, not only does the business owner miss out financially, the community is also robbed of a valuable resource as well.

It’s critical that you take the time to plan your transition scenario so you get the opportunity to decide what happens to your business. Don’t allow illness, stress, or a financial setback to make the decision for you.

2. Business Valuation and Growth Strategy

Once you’ve chosen your transition scenario, the next step is to estimate how much your business is currently worth. Business valuation depends on a multitude of factors, including your industry, competition, company size, cash flow, and more. Learning how valuation works and estimating your own business's worth will help you validate your chosen transition scenario and also set realistic expectations.

You’ll also need to decide what you want the business to look like financially at the time of transition. Does it need to grow in order to meet your financial goals? If so, you’ll need to develop and implement a growth strategy. If you’re comfortable with the business’s current size, you’ll still need a plan to maintain your market share and profitability leading up to the transition.

Note: When I create business transition plans with my clients, we always keep an eye on risk mitigation. That includes developing an alternate exit scenario and conducting tolerance analysis for any future investments.

3. Transition Team

You’ll want to assemble a team of trusted outside advisors who will help guide you through the business transition process. The makeup of your team will depend on your chosen exit scenario, but you might include a business attorney, bookkeeper, accountant, banker, business broker, and others. You may also want to include your financial advisor so you can plan for life after the transition. Keep in mind that it takes time to find the right people, but having a strong team in place ahead of your transition is invaluable.

4. Timeline and Actions

This is a high-level overview, but every business owner will have a lot of work to do to ensure a successful transition. It’s critical to start early, create a written timeline, and outline detailed action steps with due dates. You also need a system that will help you stay on track so your transition plan doesn’t fall victim to more immediate tasks.

When should you start planning? Unless you’re just starting your business, I believe every business owner should have at least a rough transition plan. If you’re over 50 or plan to exit the business within the next five years, you should have a formal, written transition plan in place.

Transitioning out of your business is one of the biggest decisions a business owner will ever make because it impacts you and your family emotionally and financially. Whether that transition is many years away or in the very near future, having a clear business transition plan will most certainly help you protect what you’ve built, minimize stress, and move forward with more confidence.

If you’re ready to start mapping out your business transition plan and the next chapters of your life, I’m here to help! Together, let’s create a plan that honors your business, helps you meet your goals, and sets you up for long-term success. If you’re ready to take that next step, let’s connect!

Growth Strategy & Business Transition Services