THE 5 D’s = Need for a Transition Plan
There are a few certainties in life, such as death and taxes. In business there are also two others; every business will either be sold or liquidated, at some point. Both these scenarios will happen either voluntarily or NOT. With proper planning the owner will ensure its voluntarily, on his or her terms.
Statistics show that in many cases the value of an owner’s business accounts for over 90% of their personal wealth. However, more than 75% of all business owners lack a formal transition plan or have no plan at all.
More often than not, the need for a business valuation arises when one of the 5 dreaded D’s occur (Death, Disease, Disability, Divorce, and Dependency). A business valuation should not be the result of a trigger event caused by one of the five D’s or a one-and-done event, but rather a tool used in a transition planning process taking place years prior to a proposed exit.
A business valuation is a valuable tool, and should be performed or updated on a periodic basis to provide an owner with an independent objective value of their business at a point in time and then updated to track the changes in value to assist in the transition planning process. Unfortunately, my experience has shown that most business valuations are predicated on triggering events rather than the result of a conscious planning process.
What is a Business Valuation?
A business valuation is more than the application of mathematical models used to derive value. It is also a thorough understanding and analysis of the Company’s industry, operations, financial position, management team, business risks, and the identification of the specific value drivers.
Depending on the circumstance and objectives of the transition plan, value to the owner can vary. A sale to an unrelated party will aim to maximize the sale price while a sale or transition to a family member or an employee(s) will aim to maximize affordability with structured payments over a period of time, possibly constrained to the cash flows of the business.
Planning for the Future
Business owners need to plan for their eventual exit and what will happen to the company when that time comes. An appropriate transition plan allows for at least 3-7 years prior to transferring ownership.
When planning for the future, business owners should not only plan for their eventual exit, but formalize a transition plan that maximizes value, addresses the owners financial needs and provides sufficient time to put all the systems in place to ensure a smooth exit.
With the continued demographic shift, and the ever increasing retirement of baby boomers, this issue will become more prevalent and pressing. Supply of businesses for sale will increase resulting in buyers gaining the upper hand in price negotiations and having the ability to cherry pick the best businesses. Start your transition plan early in order to maximize the attractiveness and value of your business to ensure you are able to sell your largest asset for top dollar.
We help clients see the true value of their business or assets. Contact us today with your questions or if you need help getting started with your exit plan.
Malahat Valuation Group