Never Too Early to Begin Transition Planning--Part 2

Assessing what's best for the company's future, and your own, should be as tactful as running the business itself
By Tom Doyal, P&M Corporate Finance
June 15, 2007

This article is the second in a three-part series about business transition planning and options.

Effective planning prepares owners, heirs, employees and customers for future change. It sets the foundation for strategic and operational decision-making and aligns owners’ long-term needs with the goals and objectives of the company and its management. It also improves the opportunity for efficient wealth transfer through long-term tax planning. Finally, it allows owners to extract wealth from the business in lower-risk scenarios as multiple options can be evaluated simultaneously. For these reasons, it is important to consider personal and business planning early in the business transition process.

The first area to consider is personal planning. Personal planning incorporates the following three areas—family dynamics, financial planning and estate planning. All three areas are related, and they require thought and delicate handling.

Family Dynamics.
When it comes to personal planning, the first consideration must be the interest of the owner and his/her family. It is crucial to evaluate and understand the various roles, responsibilities, personalities, desires and goals of family members within and outside of the business. Who will ultimately run the business? Does a family member currently involved in the business have the requisite leadership or management skills to run the company? Have you, as the owner, really listened to their interests and communicated your desires? Have you been fair to all parties involved? What do you plan to do after a transition? Do you want to have a role in the company in the future? What, besides your business, are you passionate about? It is important to identify new ways to achieve self-fulfillment. Those that don’t, often unconsciously (and sometimes consciously) sabotage the transition process.

Family dynamics can be tricky. These aren’t easy questions, and getting to the answers may be difficult. In many cases, a third party is beneficial in introducing some much-needed objectivity into the proceedings. Recognize that the decisions you make now will undoubtedly affect the family’s inter-relationship later on. It is so important to take the time to make the right decisions.

Financial Planning. There are several components associated with financial planning, the second component of personal planning. First, it is important to evaluate your current lifestyle. What are your annual cash needs? Are you planning any major purchases such as home renovations, a new car, a vacation home or traveling? Have you planned for the unexpected, like capital goods and possible health care expenses?

Second, determine your retirement goals. What kind of lifestyle do you expect? When do you plan to retire? What will be your long-term cash needs through later stages in life?

The next step is the plan. You should consult with tax, insurance and general financial advisors regarding your options. Considerations include your risk tolerance and how to manage it.

Estate Planning. The final component of personal planning is estate planning. Estate planning addresses the transfer of assets from one person to another, typically a family member, or through special gifts to others. Although the primary focus is efficient tax planning, it is also important to consider the legal process for transferring assets both before and after death (via wills, trusts, special one-time gifts, etc.) The benefit of effective estate planning is positioning the assets and thinking about who should receive the benefit of the wealth that has been created, as well as when. Once again, this touches on the family dynamics discussed earlier. You will need to consult a variety of legal and tax professionals to guide you through this process.

The goal of business planning is to create maximum shareholder value. It is important to focus on what you can control, while mitigating those areas that you cannot. For example, although you can’t control current new home construction trends, you can plan to adapt to a changing one.

Business planning incorporates three primary activities—strategic planning, operational planning and a long-term valuation plan. All are interrelated. Unlike the personal plan, the business plan will likely change over time. Therefore, it needs to be monitored and regularly adjusted based on the company’s ongoing results or changes in the market.

Strategic Planning.The strategic plan provides the organization with a view of the future and a foundation from which to make decisions; it aligns the long-term ownership interests of the owner with the long-term strategic direction of the company. It should be reviewed at least annually and analyzed in comparison to long-term fundamental shifts in markets, competitors or products. This plan should take a longer-term view of the business, its markets and the economy and typically looks out three to five years.

Key elements include a market analysis, SWOT (strengths, weaknesses, opportunities, threats) analysis, market positioning, evaluation of your competition, product evaluation, assessment of management and employees, and finally a long-term financial objective. It may also include a transition plan for the owner.

Operational Planning. The operational plan is a tactical plan that identifies specific action steps and results measures that seek to improve productivity, revenue and cash flow while reducing risk in order to meet the goals of the strategic plan. Key elements include detailed operating budgets supported by specific product development opportunities, new market initiatives, sales and marketing plans, and capital investment forecasts.

Another objective of the plan is the ability to monitor actual financial results in comparison to your original strategic and annual budgets. All key metrics must be measured against pre-determined targets, utilizing monthly or quarterly management reports. These are areas in which you have total control—use this control to execute your long-term plans. In a transition, buyers may perceive lower risk associated with a company that can optimize market opportunities, or reduce exposure to unnecessary expenses in turbulent markets. This is clearly the case in today’s residential markets as many window and door manufacturers struggle to find new growth opportunities while maintaining reasonable operating margins. By reducing risk, some buyers/investors will be willing to accept a lower return, paying a higher price for a company even in a down market. Your company’s ability to demonstrate operational and financial nimbleness while staying on course with your long-term strategic plan will bring significant value opportunities.

Long-Term Valuation. The long-term valuation plan is the measuring stick that reflects the impact on corporate value and owner wealth development from strategic and operational plans. It is a process for evaluating past and future financial performance. This plan should be at least three years and preferably five years in length.

Key elements include GAAP basis financial reporting, restatement of significant or unusual expenses or events with detailed descriptions, detailed projections including an explanation of your assumptions on revenues and expenses, and identification of hidden assets, tax considerations, and future investment needs that tie into your strategic plan. It will utilize traditional valuation techniques, incorporating multiples on revenue, EBITDA and book value, a discounted cash flow analysis, and a balance sheet assessment

In addition to supporting valuation expectations, it sets a course for potential transition options. Combined with your strategic plan and current operational results, the long-term valuation plan will provide the owner with a vision of future financial wealth creation if the plans are optimized. It also sets the financial foundation for various transition options that may be contemplated in the future.

While some of the above tasks can seem daunting at first, effective personal and business planning reduces anxiety and eliminates confusion, and allows enough time to create multiple options so that an organization is poised to make the best decision when the time arises. Proper planning cannot be emphasized enough.

G. Thomas Doyal is a managing director of P&M Corporate Finance, and has been with the firm since 2001. His responsibilities include managing the firm’s Chicago office, leading the group’s construction and building products industry team, as well as participating as a member of the firm’s board of directors. He is available to answer questions or comments at 312/602-3604 or