How to Structure Your Business for Transitional Success

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A version of this article first appeared on EideBailly.com.

By: Kyle Orwick, CPA, CMAA and Amber Ferrie, CPA, ABV, CFF, CM & AA

Most owners are not adequately prepared nor positioned to sell their business when the time comes. Why? They are heavily focused on daily operations, customer or employee issues, growth, and an endless list of other responsibilities.

Even if you are not planning to sell anytime soon, early and incremental preparation for transition can be extremely beneficial to the long-term success of your organization. In fact, we encourage you to start planning for transition up to two years before any decision is made.

What Does it Mean to be “Sell-Side Ready”?

Planning for the sale of your business takes time, effort, energy, and strategy. Sell-side readiness involves:

• Being financially and psychologically prepared to endure the efforts required in a transaction.
• Setting realistic expectations and becoming educated on the transaction process.
• Having fundamentals in place to respond to due diligence efforts.
• Preparing your team to continue business under new ownership.
• Making the necessary adjustments to optimize the value of your business.

And, above all, being sell-ride ready means setting operational goals and optimally positioning your company to achieve those goals.

How to Structure Your Business for Transitional Success

It is easy to get caught in the day-to-day operations of your business. However, if you want your organization to grow and thrive for the long-haul, you must carefully consider what will be most appealing to those who may take over after you’re gone. In other words, you will need to take off your operational hat and put on the seller hat. With the seller hat on, you can consider your business from an external perspective and factor for buyers’ interests.

Organizations operating with the future in mind strive to:

Build Strong Systems and Processes

When a business has clear systems and processes in place, such as a CRM, ERP, project management solution, and SOPs, it demonstrates a strong infrastructure and optimized operations. Additionally, utilizing data analytics and best-in-class reporting allows organizations to collect robust information and efficiently understand their business in real-time.

This sort of transparency will be invaluable at the time of transition. A business with strong systems and processes is seen as more scalable and easier to integrate into a buyer’s existing operations.

Diversify Risk

If a business relies heavily on a single product line or customer, it is exposed to significant risk if that product line or customer experiences a downturn. By diversifying product lines and customer base, your organization can reduce overall risk and become more attractive to potential buyers.

Diversifying risk may also mean structuring the company as an enterprise rather than a family-owned business. One person owning all the customer relationships, know-how, technical expertise, and the literal brand makes for an extremely risky investment for a buyer. The business must be run in such a way that if the owner were to leave, it would not have a significant impact.

Create a Strategic Exit Plan

Who will be in charge once you sell? How will your business operate without you?

Taking time to develop the next management, leadership, and ownership team and acknowledging the emotions your team members will feel during the transition process is critical to ensuring everyone on board feels ready for this next step.

A comprehensive exit plan should also account for market trends and competition, current and future financial performance, and more. This plan should provide an overview of the business, including its strengths and weaknesses, and a strategy for increasing its value. Keep in mind that this plan should be flexible to changing market conditions and should be reviewed regularly to ensure the business remains on track.

In addition to the preparation steps above, organizations should consider:

• Presenting financials utilizing accrual accounting on a monthly or quarterly basis.
• Negotiating payment terms and prices with vendors and customers to drive value.
• Ensuring contracts with vendors and customers are transferable.
• Maximizing the use of working capital.
• Increasing prospective capital, like investing in new equipment to reduce reliance on vendors.

How Can You Think Like a Buyer?

Adapting your business to buyers’ preferences involves formalizing and “professionalizing” your business – clearly defining roles, understanding margin drivers and relationships, and investing in people, processes, and technology.

Common issues that do not align with buyer values include:

• The management team is not formalized.
• There is a lack of investment in ERP systems and modern processes.
• Contracts do not include documentation that guarantees transferability.
• The business does not have a monthly financial package or an efficient monthly closing process.
• There are no formal Key Performance Indicators (KPIs) or forecasts to measure performance.

To put yourself in a buyer’s shoes, conduct a similar exercise for your own business, ideally working with a professional advisor. Acquire reports and analyze your operations through the same lens. This will help you better conceptualize your business, including how you make and lose money and where you can make changes to improve your sale. This is considered Sell-Side Quality of Earnings (QofE).

An advisor can also go beyond QofE to help you prepare for and conduct the sale, especially if they have experience working with clients on the sell side of mergers or acquisitions. They will start with understanding your timeline, goals, and the strategic aspects of the sale. Then, they will analyze your current structure and determine the necessary next steps.

Prepare for a Successful Future

Selling your business is more than a tour of the office, a handshake and handing over a check. It can be complicated and messy, and there is certainly not a one-size-fits-all approach. If you want to ensure your company survives long past your ownership, the time to prepare is now.