Managing Cash Flow Complexities – Part 4: Transition Planning

three wall racquetball courtsTransition Planning.

In high school, my brother and I would go down to the ASU campus late at night to play racquetball at the three-wall outdoor courts (these courts have been gone for years).  We played from 10pm until about 2 or 3am in the morning, mainly to escape the summer’s heat… and also because it was easy to get a court without waiting long (no one else in their right mind would play racquetball until 3 in the morning).  When I was first introduced to racquetball, I learned by experience that it was not good to get hit in the head or in the back by the ball (in fact, it’s not fun to get hit anywhere) so I constantly needed to move away from the constantly changing danger zone. Also I slowly learned how to adjust the speed and location of where I hit the ball to adapt to how my opponent was moving. If you hit the ball just right, in a location where your opponent did not expect, then it became easier to win.

As with racquetball, in a business environment you need to constantly change and react to many things (e.g. competition, economic factors, customer needs, etc.).   We need to expect that “things change.”  However stepping back from the day-to-day challenges that change brings, we cannot lose site of those things that we know are coming (or may be coming)… and plan for them. These things are usually called Business Transitions.

Business Transitions come in many forms for business owners and CEOs:

  • The first is very simple.  You are running your business and have reach a certain plateau, and you now want to transition to a higher level (e.g. take your company from $5 million in revenues to $25 million in revenues).  This may involve doing business in a different way, acquiring other organizations, moving to other U.S. or international markets, etc.
  • The second set of business transitions may have to do with your desire to stay involved with your business, but not at the same detail level.  In Jerry Mill’s book, “The Danger Zone” he discusses three levels of people in an organization:  The Grinders (those at the tactical level doing the day to day things that keep the business working), The Minders (those that manage the Grinders and watch over the business details) and The Finders (those who are looking ahead to steer the company into new markets, to introduce new products, to bring on more customers, etc.).  Right now you may spend a lot of your as a minder or grinder, but you really need to be a finder.
  • A third set of business transitions is the point when you exit from the business altogether.  This can some in many forms:
    • Planned exits usually involve one of the following:
      • An outright sale of your business (all or part),
      • Setting up an Employee Stock Ownership Plan (ESOP),
      • Working with key executives in your organization to do a Management Buyout (MBO),
      • Involving a Private Equity Group (PEG) to help leverage the equity you have in your company.
      • Planning for an Family Buyout (FBO) or a Family Transfer plan, and
      • Intentional closure or bankruptcy (this can either be planned or unplanned).
    • Unplanned exits (early death or disability, family crisis, catastrophic uninsured losses, etc.).

So how do you predict your future cash flows under any (or all) of the scenarios described above?  The complexities surrounding each of these transition scenarios can either be very simple… or enormously complicated.

A good Certified Business Transition Expert™ will not claim to know every piece to every puzzle, but instead will form a team of qualified individuals (attorneys, tax CPAs, bankers, wealth managers, insurance experts, etc.) to layout the road map for each transition option you may be considering. Once you select the option(s) for your company’s transition, this Certified Business Transition Expert™ will help lead this team and execute on the chosen plan; employing proprietary software tools that help manage the process and provide you with dashboards so you can monitor the progress.

One example of why this planning process is so important is the tax consequences of doing an outright sale of your business vs. doing an ESOP.  One method involves a taxable exchange, the other is usually a non-taxable exchange.  The legal implications between selling the stock of your business and selling the assets of your business are also vastly different. When you sell stock you are able to pass many of your direct and contingent liabilities to the buyer, whereas in a sale of assets, you usually retain the direct and/or contingent liabilities (many of these implications can be mitigated by a well-written sale agreement).

Also, there are fundamental questions related to cash flow that often go missed.  For example, how much cash would you need if you sold your business to be able to retire in the fashion that you plan?  How much cash would you need if you became permanently disabled today  and your business had to function without you?  The scenarios can be overwhelming.

As a final piece to think about…If you, as a business owner or CEO, get heavily involved in all of the details of your company’s transition planning, who is going to run your business in the meantime?  Are you skills best suited to be a Finder in your business, or to be the one who is researching the tax code for the tax implications of an ESOP transaction?   Very often, business owners and CEOs step down from their critical role as a Finder and get too caught up in transition planning.  As a result, sales may go down and profits may dwindle.

The value of your company is in its people (and especially in its Finders), its cash flow, and its relative position in the marketplace.  If a business owner or CEO stays focused on Finding and keeping cash flows and morale high, the payoffs in the transition can be enormous.  If a business owner or CEO gets caught up in the transition planning weeds, the effect on the overall value of the company can be significantly impaired.

Please contact any one of our 200+ partners in the U.S. if you need help with planning and/or managing the cash flow and other complexities of a business transition.



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