Pivoting to Value Ahead of a Business Transition

When business owners start contemplating a transition, it’s crucial to plan ahead to maximize value. Ideally, this planning should begin 3-5 years in advance, especially if no prior planning has been done. Various factors can trigger thinking about an exit plan, such as a partner’s desire for a lifestyle change, family events, health issues, or a re-evaluation of personal goals.

“Exit planning is not just a plan. It is a strategy rooted in execution that grows value while expanding options so that an owner can transition the business on their terms when they are ready. It aligns the business, personal, and financial needs of the owner.” (Exit Planning Institute) 

Once this mindset shift occurs, seeking professional advice becomes essential. There are several advisors that deliver value, but to maximize value you want to find an aligned group of advisors who can cover all of the bases that will drive and deliver value to you at the end of the transition journey. The principal advisory group should include:

A BUSINESS ADVISOR: This person should have a holistic view of the transition process and act as an Exit Planner. They will help you navigate the complexities of transitioning your business, ensuring that all aspects are considered and addressed.

AN ACCOUNTANT: Specializing in business tax planning, an accountant will help you understand the financial implications of your transition. They will ensure that your business is tax-efficient and that you are aware of any potential tax liabilities.

A LAWYER: Experienced in negotiating purchase and sale agreements, a lawyer will protect your interests during the transition. They will ensure that all legal aspects are covered, from drafting contracts to handling any disputes that may arise.

A PERSONAL FINANCIAL PLANNER: With experience in working with business clients, a financial planner will help you manage your personal finances during the transition. They will ensure that your personal financial goals are aligned with your business transition plan.

These advisors should have complementary skills and ideally have worked together before. After forming this advisory group, a committee should be established to agree on an exit or transition plan, set a timeline, organize a work schedule, and allocate responsibilities for executing each element of the plan. Coordination is key, as priorities for maximizing shareholder value change with a pivot to value before the exit.

The Importance of Pivoting to Value

Pivoting to value requires a mindset change from both the business owner and the advisors. Traditionally, business owners focus on value creation driven by increasing sales and profit. While this is a valid strategy, it overlooks a third dimension of value that professional investors recognize but many business owners miss. This third dimension involves demonstrating that the engine driving profitability (people, processes, tools, and their organization and management) is well-structured and operates smoothly, ensuring it can function independently, sustainably, and predictably.

This third dimension is a major focus of due diligence by potential acquirers. The assessed quality of this engine determines the multiple an acquirer is willing to pay for future cash flows. The more assurance of repeatability of cash flows, the higher the price an acquirer is prepared to pay. If growth and scalability potential are also evident, the business becomes even more attractive.

Accelerating Business Value

Pivoting to value can significantly accelerate the value of a business in the final years of ownership. The return on investment for advice focused on value improvement can be substantial (10 times the investment or even more).

Steps to Pivoting to Value

1. Mindset Shift: The first step is a mindset shift from focusing solely on sales and profit to understanding and improving the underlying engine of the business. This involves recognizing the importance of people, processes, tools, and their organization and management.

2. Professional Advice: Seek professional advice early in the process. Assemble a group of advisors who can cover all aspects of the transition process. This group should include a business advisor, an accountant, a lawyer, and a personal financial planner.

3. Form a Committee: Establish a committee to oversee the transition process. This committee should include your advisory group and key members of your management team. The committee will be responsible for developing an exit or transition plan, setting a timeline, organizing a work schedule, and allocating responsibilities.

4. Develop a Plan: Work with your advisory group to develop a comprehensive transition plan. This plan should include strategies for improving the underlying engine of your business, as well as strategies for increasing sales and profit.

5. Implement the Plan: Implement the transition plan, with a focus on improving the underlying engine of your business. This may involve investing in new technology, improving processes, training staff, or restructuring the organization.

6. Monitor Progress: Regularly monitor progress against the transition plan. Make adjustments as necessary to ensure that the plan is on track and that the underlying engine of your business is improving.

7. Prepare for Due Diligence: As the transition process progresses, prepare for due diligence by potential acquirers. This involves ensuring that all aspects of your business are well-documented and that the underlying engine of your business is operating smoothly.

Benefits of Pivoting to Value Prior to a Business Transition

Pivoting to value ahead of a business transition is a strategic move that can significantly enhance the overall value of your business. Here are some key benefits:

Enhanced Visibility and Control: By focusing on value, you gain a comprehensive understanding of all aspects of your business. This visibility allows you to maintain control over the transition process, ensuring that every decision aligns with your long-term goals.

Expert Guidance: Engaging with experts who can help you articulate your business, personal, and financial goals is crucial. These professionals bring deep domain skills and experience, providing you with a trustworthy reference point on a timely basis.

Experienced Advisors: Advisors with a track record of successful execution can significantly improve the outcome of your transition. Their insights and strategies are invaluable in navigating the complexities of the process.

Coordinated Team Effort: A quarterback with aligned relationships can create a fully functional exit planning team. This coordinated effort ensures that all aspects of the pivot to value are seamlessly integrated and executed.

Increased Confidence: With a well-structured plan focused on value, you can have great confidence that you will achieve your desired outcomes. This assurance comes from knowing that every detail has been meticulously planned and accounted for.

Value for Money and ROI: Investing in a pivot to value offers significant value for money and a substantial return on investment. The benefits of a well-executed value enhancement strategy far outweigh the costs, providing financial security and peace of mind.

Attractiveness to Acquirers: Demonstrating that your business operates independently, sustainably, and predictably makes it more attractive to potential acquirers. This can lead to higher multiples and a better sale price.

Sustainable Growth: By improving the underlying engine of your business – people, processes, tools, and their organization and management – you ensure that your business can continue to grow and thrive even after the transition.

The Importance of Planning Ahead

Pivoting to value is not just about increasing sales and profit; it’s about demonstrating the robustness and sustainability of your business model. By focusing on improving the underlying engine of your business, you can ensure that it operates independently, sustainably, and predictably. This will make your business more attractive to potential acquirers and increase the multiple they are willing to pay for future cash flows.

Rizolve Partners is an exit planning advisor that plots value growth strategies with its clients and works alongside owners and management teams to facilitate value growth. If you are contemplating a transition and require a confidential assessment of your situation, reach out to us today.