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Transition Growth And Exit Planning In Uncertain Economic Times

Over the course of 25 years, Josh had built a great niche manufacturing business, and he was now ready to take his chips off the table. His business was producing consistently strong cash flow at a level that is normally very attractive to most private equity group buyers. Yet he and his M&A intermediary found that no one would touch his business. When he came in to visit about this, it became clear he had made many of the mistakes business owners and their advisors commonly overlook. And he was running out of time for a course correction.

Eventually, every business owner will exit his or her business – whether voluntarily or otherwise. At that time, every owner wants to accomplish certain personal, financial, business, legacy, and estate planning goals. Most fall short.

The country and the world are, of course, in the midst of a major economic recession. The overall poor economic climate has caused fear and panic and is resulting in a wait-and-see attitude among many.

We are seeing business owners reacting to the current economy in one of two ways. Some are just hunkering down to ride out the crisis. However, most are using this economy as an opportunity to find ways to make improvements and innovations and to come out on the other side even stronger and better prepared for what the future brings. This article is intended for the latter approach.

All business owners are at some stage of transitioning out of their company. Regardless of their current transition stage, all business owners will be successful in the end only if they have taken the steps needed to keep their business intact, growing and marketable. This is precisely what Transition Growth and Exit Planning is about. This ongoing reality doesn’t take a break during poor economic times. In fact, many aspects become even more critical.

Successful Transition Growth and Exit Planning rests on 12 critical components. These components represent the best practices for protecting and growing your business and address how to always have your business ready for a planned transition and exit as well as for an unexpected exit, which can occur at any time.

The 12 Critical Components. Let’s take a brief look at how these 12 steps apply in the current economic climate.


1. Decide What I Want. The first step listed in a famous rabbit stew recipe is  “Catch rabbit.”  Likewise when we begin the Transition Growth and Exit Planning process, we don’t want to overlook the obvious. Every business owner must review and understand six prime transition and exit objectives:

  • Who do you want to transfer your business and duties to?
  • What part of the business do you want to transfer or keep?
  • Where do you want to reside after your exit?
  • When do you want to exit from active duty and ownership?
  • Why do you want to exit?
  • How much net cash-in-pocket do you need or want to receive upon your exit?

2. Decide What I Have. This has become a more difficult question lately (as to both company and personal investment values). The initial focus here is to know where your company value stands and how it is to be determined, as this analysis affects each of the other steps.


3. Protect My Family. Regardless of the economy, you need to make sure your family is protected. This is done by having the proper business owner estate plan and adequate financial resources. The present economy may prompt a need to enhance your life and disability insurance coverages in case you and your family won’t be able to realize in the near term the income or value you may have expected from your company.

4. Protect My Business. When your company’s ongoing capabilities are being challenged by an economic recession, the last thing you need is to compound that challenge with further adversity which you could have avoided.  This step addresses this risk.

5. Protect My Ownership. When times are tough, you and your partners may be more prone to disputes, both as to operating issues and valuation issues. It’s important to have a well-constructed Business Continuity Agreement and Buy-Sell Agreement and to have the right metrics addressed in the chosen company valuation method or approach within the agreement.


6. Grow My Investments. As of the beginning of 2009, not a lot of growth has been occurring. This step in the planning addresses how you should be responding to losses in outside investments and considers whether you have the right investment strategy and advisor team in place. Growth is a key to keeping your transition timing on target.

7. Grow My Business. This step addresses whether the key business logic components as to how your business makes money (your Business Model) and the strategic actions to grow profitability (your Strategic Growth Plan) are current, effective, innovative and profitable. Now is also the time to look at business acquisition opportunities at potentially favorable prices.


8. Prepare My Management. If you think you may be feeling uncertain about your company’s future prospects, consider how your key personnel and other members of your work force are coping. Now is exactly the time to assure them of their role in your vision for the company and of your ongoing transition and future exit vision. When the company is hurting, can you afford to lose any key members of your team? Have you fully considered their need to become more engaged in your long term vision? Are you taking this opportunity to find top talent at other companies?

9. Prepare My Company. Have you prepared your corporate structure, your accounting system and controls, your corporate housekeeping, and your control of the company’s ability to freely act for successful and efficient operation? The actions in this step are critical regardless of the stage of the economy.

10. Prepare My Tax Savings Plans. Your tax saving strategies should be implemented well in advance of your exit to be fully effective. Some of these strategies are more effective when initiated in a down economy, especially where values and interest rates are low (e.g. a family stock gifting program, family stock sales, and GRATs, some of which ideas have been discussed in past issues of this newsletter).  Certain state tax incentive programs need to be (or are more effective when) engaged ahead of your growth, so initiating these in an economic downturn can actually work out better.


11. Plan My Inside Route Exit. This step helps you decide how to incent your key personnel to stay and help you to take the steps needed now for them to become the potential future buyers of your company. When company values are low, incentives can present your key personnel with the opportunity to become invested in your company’s success.

12. Plan My Outside Route Exit. When the marketplace is off, that is especially the time to determine how to come out stronger. It is the time to be critically addressing what you can do now to build future company value in the M & A marketplace and to determine whether you have time bombs within your business that will undermine your future plans and expectations. Don’t wait like Josh until your options disappear.

Keep Looking Ahead

By looking down the highway through a clear windshield while keeping an eye on the important information on the dashboard, business owners will see and be able to pursue the next opportunities that are coming their way. You don’t want to catch them in the rear view mirror after they have passed you by. This approach applies both as to how you work in your daily business as well as how you work on your business (by addressing your Transition Growth and Exit Planning needs and opportunities). Neither can cease simply due to the current downturn in the economic cycle.

If you would like a complimentary copy of Nick’s latest book, “The Next Move For Business Owners: The Transition Growth and Exit Planning Strategies You Need to Know,” please contact Nick at (402) 633-1489.