Create Transitional Plan Prior to Selling Your Business

What Is A Transitional Plan?

Business owners should strongly consider writing a transitional plan prior to selling their business. A transitional plan describes exactly how all of the business operations and responsibilities of the owner are handed off to the buyer after the closing. A good transitional plan assures the buyer that the competitive advantages and goodwill of the business will remain intact even after the seller is no longer the owner. This will result in a more attractive valuation for the business and a smoother sales process. The specific type of transitional plan depends on the type of business being sold, with more emphasis given to trouble spots that a buyer may face during the post-closing transitional process. A strong transitional plan will maximize the value of the business, ensure operational continuity, and secure a smooth handover to the buyer. 

Transfer Business Operations

Many businesses – especially larger firms – have critical relationships with a wide variety of vendors, employees, and customers. A transitional plan should list key vendors or suppliers and indicate which may require the buyer to qualify themselves before being given the same vendor terms. Likewise, a transitional plan should let the buyer know how key customers are invoiced and handled so that such customers are retained. A good transitional plan may also incorporate an employee organizational chart with pertinent employment terms for key staff members. The transitional plan can further describe the best way in which to introduce the buyer to its management staff and key employees after the sale. The more prepared the buyer is to meet and deal with key employees, then the more likely it is that such employees will stay after the sale.

Role of the Owner in Transitional Plan

  • A business owner who plays an active role in the business must specifically address how their role will be transitioned away from themselves after the closing.
  • This is especially important when the business owner has a unique and special skill set that is difficult or costly to replace.
  • The key step in transitioning the role of the owner is offering the buyer a certain period (typically 30 days) of free training after the closing.
  • The free training period allows a serious buyer to learn directly from the seller and copy what the seller does on a day to day basis.
  • During the free training period, the seller introduces the buyer to key suppliers, employees, and customers.
  • The seller should emphasize that the business is on solid ground with the new buyer and that the relationships will remain intact.
  • The transitional plan should write down when and how introductions are to be made with all relevant parties.
  • When a business owner has a unique and special skill set that the buyer may not possess, the transitional plan may identify or suggest possible replacements.
  • For example, let us imagine a physical therapist who owns a physical therapy center and wishes to sell her clinic.
  • Here, the transitional plan may suggest how the owner’s role may be replaced by another physical therapist who works in the clinic.
  • The costs and implications of replacing the owner’s role should be estimated and described in the transitional plan.
  • This way, a buyer who is not a physical therapist at least has a clear pathway of ensuring continuity of the business operations after the sale.

Cost of Replacing Owner Impacts Valuation

When a buyer of a business may not be reasonably expected to replace the owner’s role, then the cost of replacing the owner is deducted from the adjusted owner benefit. This is especially true if the owner has personal relationships with key customers, suppliers, or employees who may not stay after the sale. If the buyers faces extra risks and costs of replacing the owner, their Return of Investment (ROI) goes down. This adversely affects the business valuation, and can best be avoided when the owner transitions themselves to the best extent possible out of a day to day role prior to the sale. A transitional plan should try to alleviate the negative impact of replacing the owner by suggesting specific actions the buyer may take to ease the cost burdens and lessen the risks of lost business.

Owner’s Family May Impact Transition

Often times, a small business owner will employ family members who either actively work in the business or may not work in the business (but still get paid to do so). The salaries of all family members must be adjusted by the business broker to reflect their replacement costs. The employment responsibilities and salaries of all family members should be noted in the transitional plan. If key family members would not want to continue working in the business for the buyer, then the transitional plan should list how the business could continue functioning without them. This may include suggesting possible replacements or reorganizing the employee organizational chart in a more efficient manner. Since it is not expected that family members of the sale would stay after the sale, their status should be fully addressed in the transitional plan.

Creating a transitional plan prior to selling a business will give a buyer more assurances that the profits of the business will remain intact after the sale. A good transitional plan shows a buyer how they may retain key relationships with suppliers, customers, and employees. Business owners who play an active role in the business should describe how they will transition themselves out of the business in a way that lessens the buyer’s risks of business disruption and reduces their own replacement costs.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.