You probably came here looking for a business succession planning template.
If you were expecting to complete a short template and be done with succession planning, I have some bad news for you. Succession planning doesn’t work like that.
Just as you invested time and energy while building your business, it will take time and energy to find the best exit strategy.
On the other hand, if you’re looking to fully understand your succession planning options and the process of exiting your business…keep reading. This guide to succession planning will provide a template for transitioning to your next chapter.
Having worked with many entrepreneurs over the years, I know the value of your time. To that end, this guide will be as short as possible…but it will have sufficient depth to give you an understanding of how to best transfer your family business.
You might be asking why I’ve said the best strategy or how to best transfer your family business, but I haven’t mentioned getting the highest price for your business. Don’t worry, I’ll be covering that too. It’s important to note that getting the highest price for your business isn’t always the best strategy, depending on your goals.
I’ll be talking about goals a lot, at least early on. I’ve found that many business owners don’t have a clear vision of their post-business life or a defined set of goals, and that’s totally fine. I’ve included a few short exercises to help you visualize your life after leaving the business.
I’ve also included a section on defining who you are apart from owning your business.
Many business owners have a hard time in the first few years after retirement. According to the Exit Planning Institute, 75% of business owners regret selling their business within a year of the sale. Much of that regret stems from owners feeling a loss of identity when they no longer have the business providing a sense of self-worth.
I see it in retirees all the time, but the effect is magnified for someone who built their own company. I own my own business, so I get it. As owners, we pour ourselves into making our businesses successful because no one else cares like we do. It often becomes part of our identity, and we wear it as a badge of honor. That works, until it doesn’t. When business owners sell, they often have to spend time learning who they really are and what’s truly important. I say all this because, as I’ll discuss more later, the transition is easier when you plan ahead.
Speaking of planning ahead, that’s why you’re here. You might want to transfer your business to your son or daughter, sell to an ESOP, or sell to a strategic buyer. No matter the path, exiting a business requires thoughtful planning and execution. For many owners, their business not only represents their primary source of income, but it is also their legacy. You’ve put years of hard work and dedication into building your company; planning ahead gives you the ability to protect and maximize your legacy, however you define it.
The consequences of failing to plan are stark. The Exit Planning Institute reports that 70% of business exits fail to meet the owner’s expectations because they did not plan adequately. Since 80-90% of a business owner’s net worth is typically invested in their company, it’s essential to unlock and maximize that value. For manufacturing business owners, exit planning is not only the right strategy, but also critical to their financial security.
This guide will help you understand:
How to sell your business.
The timeline for selling your business.
How to prepare your business to function without you.
Which exit options are best for you.
How to increase the value of your business.
How to minimize taxes on the sale.
Why Succession Planning Matters: Value Preservation and Growth
Buyers pay more for quality businesses. If you want to have a successful exit and maximize the amount you receive, you’re going to have to make your business as attractive as possible. Just like when selling a house, curb appeal matters. The difference is that curb appeal to a business buyer includes growth metrics, profitability, and technology improvements…among other items.
By highlighting the strengths of your business, you can actually increase the value of the company during the exit planning process. This process requires a strategic focus on both protecting existing value and identifying opportunities for growth. By addressing operational inefficiencies, enhancing value drivers, and mitigating risks, you can create a more attractive deal for potential buyers.
Baseline Business Valuation Conducting a professional business valuation establishes a baseline for understanding the company’s current worth. This step helps identify areas for improvement and provides a benchmark for measuring growth. I’ll go into more detail on valuations later on.
Enhancing Key Value Drivers
Revenue Stability: Building recurring revenue streams and diversifying the customer base to reduce dependency on a few key clients.
Operational Efficiency: Streamlining production processes, adopting lean manufacturing principles, and leveraging automation to improve margins.
Market Position: Strengthening the company’s brand, reputation, and competitive edge in the marketplace.
Risk Mitigation Addressing risks that could impact business value is critical. This includes implementing contingency plans for supply chain disruptions, maintaining regulatory compliance, and safeguarding intellectual property. The last is critical, as trademarks, copyrights, patents, and other intellectual property will come up during the due diligence period.
Investment in Technology Upgrading to modern equipment and integrating smart manufacturing technologies can boost efficiency, lower costs, and increase the business’s appeal to buyers by making the process more streamlined.
Strong Management Team Ensuring that the business is not overly dependent on the owner is vital. Developing a capable and experienced management team signals operational stability and continuity to prospective buyers. If owner input is necessary daily, it’s a job…not a business.
Financial Health Maintaining accurate, up-to-date financial records and demonstrating consistent profitability enhances buyer confidence. Clean up your financials prior to the valuation, so that you know the numbers are accurate.
By focusing on these strategies, manufacturing business owners can preserve and grow their company’s value, ensuring they are well-positioned for a successful exit.
Common Pitfalls in Exit Planning
Despite the importance of exit planning, many manufacturing business owners fall victim to common mistakes that significantly impact their ability to achieve a successful transition.
Recognizing and addressing these pitfalls early in the process can help mitigate risks and increase the likelihood of a smooth exit.
Delaying the Planning Process Too many owners postpone exit planning until it is too late, reducing their options and limiting time to implement necessary changes. Starting the process early provides flexibility and allows for strategic adjustments. You can’t expect results if you only begin planning 30 days before you close the deal.
Underestimating the Importance of Valuation Failing to obtain a professional business valuation can lead to unrealistic expectations about the company’s worth. We all think our baby is the prettiest, which is why professional valuations are so important. An unrealistic expectation can sink even the best marketing effort.
Focusing Solely on Price Owners often prioritize obtaining the highest price, overlooking the importance of deal structure and terms. Factors such as payment timelines, tax implications, and post-sale involvement can significantly impact the overall success of the exit. When negotiating, terms are often more important than the headline price, especially if parts of the purchase price are tied to metrics out of your control.
Neglecting Operational Independence Businesses who rely on the owner for daily operations are less attractive to buyers. Developing a strong management team and delegating responsibilities can enhance the company’s appeal.
Overlooking Tax Implications Poor tax planning can result in unnecessary liabilities, reducing the net proceeds from the sale. Consulting with tax professionals prior to the sale can help minimize these burdens. Don’t be the business owner who surprises their CPA at tax time, then asks what they can do to offset the gains.
Inadequate Succession Planning Whether transitioning to family, employees, or external buyers, failing to prepare successors can jeopardize the business’s continuity. Training and mentoring future leaders are critical for a successful handover.
Ignoring Market Conditions Timing plays a crucial role in exit planning. Selling during unfavorable market conditions can reduce valuation and limit buyer interest. Staying informed about industry trends and economic factors is essential.
Impact on Stakeholders
Your business impacts more than just you. As a business owner, you provide jobs for employees, make purchases from suppliers, provide goods to your customers, and you might even sponsor a Little League baseball team. Taking a thoughtful and strategic approach to managing these impacts is essential for preserving relationships, maintaining continuity, and enhancing the long-term success of the business.
Employees often face uncertainty during ownership transitions. Clear communication and transparent planning can alleviate concerns and foster trust. Retention plans, benefits continuity, and involvement in transition planning are vital for keeping key talent engaged.
Customers depend on the business for reliable products and services. Maintaining consistent quality and service during the transition helps to preserve customer relationships and brand reputation. Communicating with major clients about the transition can further strengthen trust.
Suppliers and Partners Suppliers and business partners need assurance that the transition will not disrupt operations or payments. Building confidence through open communication and timely updates can ensure these relationships remain strong.
Community Many manufacturing businesses are deeply embedded in their local communities, providing jobs and economic support. A well-executed transition plan considers the broader community impact, ensuring minimal disruption and continued local contributions.
Successors and Buyers Whether transitioning to family, employees, or external buyers, successors must be set up for success. Providing comprehensive training, clear operational documentation, and strategic insights helps ensure they are well-prepared to take the reins.
How To Sell My Business Fast: Understanding the Exit Planning Timeline
Now we know why it’s so important to plan when selling your business. Let’s move to the actual process and timeline for selling your business.
Most business owners only go through this process once in their career, so this is often new. New is a synonym for scary, it’s human nature. By understanding the timeline and process of selling your business, it’s possible to take some of the anxiety out of the equation.
Don’t be surprised by the length of the timeline. If you want to sell your business quickly, you’ll likely be leaving money on the table. A well-designed exit strategy takes years to implement and involves specific steps to address key issues and ensure a successful transition. Below is an ideal timeline, beginning 3-5 years before you walk out the door for the final time. If some of these aren’t clear, don’t worry. I’ll be breaking down each of these items in depth later.
3-5 Years Before Exit: Initial Preparation
Define Your Goals: Determine your personal and financial goals, and your legacy objectives. Are you focused on maximizing the sale price, preserving company culture, or transitioning to the next generation of family ownership?
Assemble Your Advisory Team: Hire a financial planner, attorney, exit planner, and other experts to help guide you through the process.
Complete a Human Capital Assessment: Evaluate your management team and employees. Are top level leaders capable? Do you have a strong second layer of management? What is your employee retention and development strategy?
Develop a Transition Plan: Start transitioning key roles to your management team and consider hiring a transition leader to guide the process.
Increase Diversification: Broaden your company’s customer, product, and geographic offerings to reduce dependencies.
2 Years Before Exit: Enhancing Value & Planning Transition
Maximize EBITDA: Focus on growing earnings by optimizing operations, negotiating better contracts, reducing costs and expanding revenue.
Maximize Revenue: Develop a strategic growth plan to increase revenue and expand market share.
Pursue Growth Markets: Aggressively pursue new markets and projects to diversify the customer base and reduce reliance on a few large contracts, while showing increased growth metrics.
Retain Key Employees: Implement an employee retention program to ensure critical employees stick around through the transition.
Finalize Transition Leadership: Name a transition leader and develop a plan to transfer company culture and leadership.
Less Than 2 Years Before Exit: Transition Preparation
Finalize Valuation: Update the valuation one last time to reflect any improvements and market conditions.
Prepare Financial Reporting: Ensure financials are accurate and complete, then develop a plan to present financial projections to buyers.
Assemble a Due Diligence Folder: Organize critical business data, including financial records, contracts, and operating information, to present to buyers.
Prepare for Closing: Plan for the transition by setting timelines, assigning responsibilities, and communicating with stakeholders.
Maximize Company Value: Focus on perfecting systems and processes to ensure a smooth transition.
Exit
Close the Transaction: Finalize the sale and transfer ownership.
Post-Exit: Enjoy your new trajectory, whether it is retirement, pursuing another business, or hobbies.
Transition Leadership: Make introductions to your management team and begin transitioning leadership.
Post-Sale: Enjoy Your Fruit of Labor
Consult for the New Owners: Offer consulting services to help the new owners resolve operational issues or provide guidance on strategic initiatives. This can also be structured in the sale to enjoy a second bite of the apple and increase your overall payout.
Enjoy Retirement or Pursue Other Ventures: Focus on the things you want to do in this next phase of life.
Succession Planning Best Practices
Create a Written Exit Plan: A written exit plan helps you prepare for the future and ensures you are properly positioned for your desired trajectory. Update it annually and revisit it quarterly.
Increase Company Dependability: Buyers don’t want to inherit your problems. Focus on eliminating or mitigating them before you put your company on the market.
Mitigate Risks: Many risks are hidden, and owners are not aware of them. Conduct a risk assessment with the help of your advisory team to identify and mitigate potential pitfalls.
Document Your Systems: Documentation of your company’s systems, including operations, finance, IT, and HR, is just as important as having a comprehensive exit plan.
Prepare for Your Next Journey: Exiting your business is a significant life milestone. Whether you want to retire, pursue hobbies, travel, or start a new business, or focus on your charity work, planning for your next journey is critical to your happiness and success.
Who’s in Your Corner: The Perfect Exit Planning Team
Since you’ll only go through the succession planning process once in your career, you want to stack the deck in your favor by bringing on a team of experts who deal with exit planning every day. Here’s my approach to building a succession planning dream team. I should mention that I often see one person filling multiple roles, i.e. the Wealth Manager also serves as the Exit Planning Consultant. Likewise, the M&A Advisor often serves as the Business Valuation Expert. You don’t want one person handling all roles though, as one individual doesn’t have the bandwidth to be an expert in each of these areas.
Below is a description of the key roles, their areas of expertise, how to find and vet each professional, and typical fee structures.
Exit Planning Consultant
Role and Expertise:
An exit planning consultant is the overall project manager, helping you define your goals and develop a comprehensive exit strategy. They ensure all the moving parts work together and are properly coordinated. While they are not experts in all areas, they understand business valuation, succession planning, and how to integrate legal and financial strategies. The exit planning consultant will often work with you to increase your business valuation by improving specific metrics in the 2-3 years leading up to selling your company.
Finding and Vetting:
Seek referrals from trusted industry peers or business networks.
Look for certifications like CEPA (Certified Exit Planning Advisor).
Review their track record of successful exits and client testimonials.
Fee Structure:
Typically charges hourly rates ($150-$500/hour) or project-based fees ($10,000-$50,000), depending on the complexity of the exit.
Business Valuation Expert
Role and Expertise:
A valuation expert determines the market value of the business using financial analysis, industry benchmarks, and growth potential. They provide a realistic basis for setting expectations and negotiating with buyers.
Finding and Vetting:
Use professional organizations like the American Society of Appraisers (ASA) or the National Association of Certified Valuators and Analysts (NACVA).
Verify credentials such as CVA (Certified Valuation Analyst) or ASA (Accredited Senior Appraiser).
Request sample reports to assess the depth and clarity of their analyses.
Fee Structure:
Fixed fees ranging from $5,000 to $50,000, depending on the business size and valuation complexity.
Legal Counsel
Role and Expertise:
An experienced attorney drafts and reviews legal agreements, ensures compliance with regulations, and protects the owner’s interests during the sale. Their expertise includes contract law, intellectual property, and corporate governance.
Finding and Vetting:
Seek attorneys specializing in mergers and acquisitions (M&A) or business transitions.
Use state bar association directories to verify licensure and specialization.
Conduct interviews to gauge experience with similar transactions.
Fee Structure:
Charges hourly rates ($300-$1,000/hour) or a percentage of the transaction value (1-3%).
Tax Advisor
Role and Expertise:
A tax advisor develops strategies to minimize tax liabilities related to the sale, including capital gains, estate taxes, and income tax implications. They also ensure compliance with federal and state tax laws.
Finding and Vetting:
Look for CPAs or tax attorneys with expertise in business transactions.
Check credentials like LLM (An attorney with advanced education in taxation) or CPA.
Request case studies of previous clients with similar exit scenarios.
Fee Structure:
Hourly rates ($200-$500/hour) or flat fees for specific tax planning services ($5,000-$20,000).
M&A Advisor or Business Broker
Role and Expertise:
An M&A advisor or business broker identifies potential buyers, markets the business, and negotiates terms. M&A advisors typically handle larger transactions, while brokers focus on smaller deals.
Finding and Vetting:
Use professional associations like the International Business Brokers Association (IBBA) or M&A Source.
Verify credentials such as CBI (Certified Business Intermediary).
Ask for a breakdown of their success rate and typical deal size.
Fee Structure:
Brokers charge a success fee of 8-12% of the transaction value, while M&A advisors charge 1-5% for larger deals.
Wealth Manager
Role and Expertise:
A financial planner aligns the exit strategy with the owner’s personal financial goals, including retirement planning, investment strategies, and estate planning.
Finding and Vetting:
Look for both CFP (Certified Financial Planner) and CEPA (Certified Exit Planning Advisor) credentials.
Use a Fee-Only advisor to minimize potential conflicts of interest. Don’t be misled, if an advisor says Fee-Based, they’re not Fee-Only. It means they’re partially paid through (often hidden) commissions.
Confirm the advisor is a fiduciary in all situations, not just during a certain transaction.
Check membership in organizations like the Financial Planning Association (FPA) or the Exit Planning Institute (EPI).
Ensure their approach aligns with your financial goals and risk tolerance.
Fee Structure:
Typically charges a percentage of the assets they manage for (0.5-1.5%).
Why CEPA Matters:
The Certified Exit Planning Advisor (CEPA) credential is a hallmark of excellence for professionals specializing in business exits. CEPA-certified financial planners have undergone rigorous training to understand the unique challenges and opportunities of exit planning. They are adept at integrating financial, operational, and personal goals into a cohesive strategy. Working with a CEPA ensures that:
The owner’s personal financial goals align seamlessly with the business exit strategy.
Tax optimization and wealth transfer plans are designed with a long-term perspective.
The exit process accounts for both financial performance and the owner’s legacy aspirations.
Owners benefit from a CEPA-certified planner’s ability to coordinate with other advisors, ensuring a comprehensive approach that addresses all aspects of the transition.
Accountant
Role and Expertise:
An accountant ensures accurate financial records, prepares reports for due diligence, and provides insights into cash flow, profit margins, and debt management.
Finding and Vetting:
Seek CPAs with experience in business transitions.
Verify their expertise in your industry by requesting references.
Review sample financial reports for quality and accuracy.
Fee Structure:
Hourly rates ($150-$400/hour) or project-based fees for specific services ($5,000-$20,000).
Key Steps in the Exit Planning Process
Successfully exiting a business requires a well-structured plan with clearly defined steps. The process begins with establishing goals and assessing the business’s value, forming the foundation for all subsequent decisions.
Step 1: Establishing Goals
We define ourselves through what we do. The next time you’re at a party, pay attention. The first question asked after meeting someone new is usually so what do you do?
Retired business owners have trouble answering this question because they put so much of themselves into their business. Countless times I’ve seen retirees struggle to answer the question who am I apart from my business?
Here are some exercises I use with my clients to help define who they are, what’s important them and what they truly want to accomplish.
What Drives You
George Kinder, father of the Life Planning movement, used three questions to help individuals define their aspirations and goals. I studied under Kinder in graduate school and I now use the questions with my clients.
Imagine you won the lottery tomorrow. How would you live your life? What would you do with the money? How would you spend your time?
Imagine your doctor tells you that you have an incurable disease and you have 5-7 years to live. You won’t ever feel sick, but you’ll have no notice before you pass away. What will you do to make the most of your remaining time? Will your life change and if so, how?
Imagine being on your deathbed, with a few hours left to live. Looking back at your life, ask yourself what you missed? What do you wish you had done? Who did you not get to be?
Who Are You?
What role has your career played in your identity?
Do you have a plan for navigating the changes to your sense of self when you transition from professional life?
Who are you beyond work?
What identities are important to you? (i.e. Father, Grandmother, Gardener, Coach, Hunter, Friend)
What are your biggest fears around retirement? (i.e. loss of social interaction, lack of purpose, or isolation?)
Define Your Retirement
Retirement looks different for everyone. Here are some questions to help envision your best retirement.
On your first day of retirement, what will you do?
Once the newness has worn off, how will you spend your time?
Who do you want to spend your time with?
What hobbies do you want to pursue?
How will you keep up or increase your fitness?
Where do you want to live? Do you want to relocate or downsize?
Do you want to work part-time or volunteer? Where?
Understand Your Financial Needs
We’ve defined your retirement, but we haven’t talked about numbers. Let’s do that now.
I start by looking at the income needed. I’m going to classify all this as “spending”, which you’ll see below.
Expected Monthly Spending
Any one-off or large purchases
Any debts that will be paid off during retirement
Legacy planning, such as supporting family members or charitable giving
Next, look at how much income you’ll have apart from your business. This is “Outside Income” or income unrelated to your business.
Social Security
Any pension or annuity payments
Real Estate rental income
Disability payments or anything not already accounted for above
Once you know these two numbers, you can estimate the assets you’ll need to support your lifestyle. It’s a very rough calculation and I go into more detail with my clients, but this will work for a back of the napkin estimate.
Monthly Income Needed = Spending – Outside Income
The Monthly Income Needed is the income you’ll need to supplement using your savings, whether that’s from retirement accounts like a 401k, IRA, or Roth, from a savings account, or from the proceeds of selling your business.
To ballpark the lump sum needed to cover the monthly income, you can multiply the Monthly Income number by 20 x 12. This assumes a 5% withdrawal rate. If you want to be more conservative and use a 4% withdrawal rate, you can multiply by 25 x 12.
From the lump sum necessary, you can subtract any investments you already have.
The remainder is the amount you need to realize from the sale of your business to support your expected standard of living throughout retirement.
Retirement Example:
John owns a machine shop and is ready to retire. Here are his numbers:
He needs $10,000 per month, gross, to live comfortably.
He will begin Social Security when he retires. From there he will receive $2,500 monthly.
He has a rental home and receives $1,000 from it monthly, net of expenses.
He has $750,000 in the 401k he primarily put in place for his employees.
$10,000 – ($2,500 + $1,000) = $6,500 (Net Monthly Income from Investments)
$6,500 x 12 = $78,000 (Annual Income from Investments)
$78,000 x 20 = $1,560,000 (Total Assets Required)
$1,560,000 - $750,000 = $810,000 (Net amount he needs from the sale of his machine shop)
Define Legacy Goals:
Your business is part of your legacy. Thinking about your legacy will influence decisions about the future of the business. You should ask:
Do I want the business to remain locally owned or family-run?
How important is maintaining the company’s culture or mission?
What provisions should be made for employees and key stakeholders?
By defining these goals early, you can prioritize their values and ensure their legacy is preserved.
Step 2: Conducting a Business Valuation
Expectations are everything, especially when it comes to the value of your business, and setting a realistic valuation is the first step in unlocking that value. Before we talk about what goes into setting a business’s value, let’s talk about why an accurate baseline is so important.
Instead of a business, let’s imagine a home going up for sale. The house has been redone and looks absolutely great. The homeowner has put a lot of time and effort into the renovations, so they tell their realtor to list it for $1,000,000. The realtor ran comps for their area and came back with an estimate closer to $600,000, but the homeowner insisted on the higher price. After six months and multiple price cuts, the house does end up selling…for $575,000.
There are some takeaways here that are directly applicable to selling a business:
There was nothing wrong with the home, only with the price.
Going through multiple price cuts before getting to a market price is a negative signal to the market, saying that the seller either A) isn’t serious about selling or B) might be an unreasonable negotiator.
Time matters. Is it worth extending the sales and negotiation process an extra 6 months or more for a relatively small difference in price?
Applying these takeaways, you can see that the best way to begin the formal succession planning process is by conducting a business valuation.
I’ve explained why the valuation is important to the sale of the business, but it’s equally as important for tax planning purposes. If you plan on transferring shares in the business to a Family Limited Partnership, donating them to charity, or you think you might have a taxable estate…the independent valuation will be important for tax compliance later on.
A third benefit to getting an initial valuation is that it tells you why your business is a certain value, not just the value. You can see the levers that go into the valuation, which you can focus on when maximizing your company’s value in the period leading to the sale.
So, what is my company worth?
There are many different ways to value a company, and each will provide a slightly different value. You’ll most commonly hear about using multiples of Seller’s Discretionary Earnings (SDE), EBITDA, or revenue. Typically, a multiple of SDE is used for smaller businesses in which the owner is actively working. On the other hand, EBITDA is a more accurate measurement for larger businesses where owner compensation is a relatively small portion of overall earnings. Revenue multiples are usually the simplest, and least accurate, method of estimating value.
When you hire a valuation expert, they will likely provide you with a range of value, supported by different valuation methods. I’m not going to spend much time breaking down the actual math, that’s why you pay the expert. Instead, I’m going to explain the financial metrics they’ll be using in the process.
Analyze Key Financial Metrics:
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): EBITDA serves as a standard measure of profitability and is often used to calculate valuation multiples. For manufacturing businesses, current EBITDA multiples range from 4x to 8x, depending on factors like industry growth rates, operational efficiency, and competitive position. The mean EBITDA multiple across sectors is approximately 6x, with the median slightly lower at 5.8x.
Revenue Multiples: These are particularly relevant for high-growth or tech-oriented manufacturing firms. Revenue multiples for manufacturing businesses typically range from 0.8x to 2.5x. The mean revenue multiple is 1.6x, with the median at 1.5x, reflecting market trends and buyer expectations.
Cash Flow: Consistent positive cash flow indicates financial health and stability, key factors that drive higher valuation multiples. A well-documented history of cash flow consistency can increase buyer confidence.
Assess Intangible Assets:
Intangible assets can account for a significant portion of a business’ value. Examples include:
Proprietary Technology: Unique tools, systems, or innovations that give the company a competitive edge can significantly boost value. Think patents and other intellectual property.
Brand Equity: A strong, recognizable brand with high customer loyalty enhances perceived value.
Strategic Partnerships: Relationships with key suppliers, distributors, or industry leaders often add a premium.
Benchmark Against Industry Peers:
Comparing performance to similar businesses provides context for the valuation. Industry benchmarks and recent transactions offer valuable insights into market conditions:
Profit Margins: Manufacturing businesses often achieve gross profit margins between 30% and 50%, depending on the sector.
Growth Rates: Annual revenue growth of 10% or more is viewed favorably, particularly in niche markets.
Market Share: Businesses with a significant share in a growing market tend to attract higher valuation multiples.
Where to get a valuation?
Most folks go to a CPA when it’s time to get a valuation. That’s fine, but you’ll want to ensure you’re hiring a CPA who does valuations on a regular basis, not just the one-off every other year.
Market trends change, you want an expert who can give you an insight into current trends…not just calculating a value using stale multiples they found online. To this end, there are several software tools that are helpful in the valuation process. I would make sure the valuation expert is using some sort of tool which aggregates the latest data.
Finally, look for credentials like the Certified Valuation Analyst (CVA) when hiring a valuation expert.
Review and Use the Results:
Once the valuation is complete, owners should:
Identify Value Drivers: Focus on enhancing aspects like operational efficiency, customer retention, and product innovation.
Align Valuation Insights with Exit Goals: Ensure the valuation aligns with financial objectives and desired sale outcomes.
Prepare for Negotiations: Use the valuation as a foundation for discussions with potential buyers, supported by data and market context.
Step 3: Exploring Exit Options
Choosing the right exit strategy is a pivotal step in ensuring a smooth transition and maximizing the value of a manufacturing business. Below are some of the most common exit options, along with insights into their benefits, challenges, and considerations.
Family Business Succession Planning
Family businesses are special. Transferring ownership of a family business involves balancing the desires of the current owners, the skills and interests of the next generation, along with ways of equitably dividing inheritances with children who don’t want to be involved in the family business. It’s a lot to work through.
Clear communication, formal training programs, and a structured transition plan is critical to ensure the successor is equipped to lead. Estate and tax planning are also essential to minimize financial burdens during the transfer.
Family succession is most suited for businesses with stable revenue and EBITDA margins, where profitability is consistent, but growth potential may be moderate. For example, companies with EBITDA between $1 million and $5 million and a strong track record of financial performance are ideal candidates for this transition, as the focus is often on maintaining legacy rather than aggressive scaling.
Management Buyouts (MBOs)
An MBO involves selling the business to key employees who are already familiar with its operations and culture. This option offers continuity, as the new owners are already well-acquainted with the company’s processes and stakeholders.
The primary challenge with MBOs is financing. Employees often lack the capital needed to purchase the business outright, necessitating creative financing arrangements such as seller financing or SBA loans. Owners must also assess whether the management team possesses the strategic vision and leadership skills required to ensure long-term success.
MBOs are best suited for companies with strong cash flow and predictable revenue streams, typically with EBITDA margins of 10-15% or higher. Businesses generating annual revenues between $5 million and $20 million often have the financial stability to support this type of transition, ensuring that the management team can secure funding while maintaining operational momentum.
Strategic Sale
Selling to a strategic buyer, such as a competitor or a company in a related industry, can yield a premium price. Strategic buyers often value the synergies that a merger or acquisition can bring, such as expanded market share or operational efficiencies.
This process, however, can be lengthy and complex. Owners must prepare for rigorous due diligence and negotiations. There is also the potential risk of cultural misalignment post-sale, which can disrupt operations and employee morale.
Strategic sales are ideal for businesses with high growth potential, proprietary technology, or market dominance. Companies with EBITDA of $2 million or more and strong revenue growth exceeding 15% year-over-year are attractive to strategic buyers, who often seek opportunities to leverage synergies and gain competitive advantages.
Private Equity Sale
Selling to a private equity firm can provide liquidity while enabling the business to scale under new ownership. Private equity buyers often inject capital and expertise to drive growth, making this an attractive option for businesses with significant potential.
However, owners may need to relinquish some control and may be required to stay involved in the business for a transition period. This option is best suited for businesses with strong financial performance and growth opportunities.
Private equity buyers typically target companies with EBITDA in the range of $5 million to $50 million and annual revenues exceeding $10 million. Businesses with high scalability, recurring revenue models, or opportunities for operational improvements are particularly appealing to these investors. Private equity has changed over the last decade as more funds have opened. This change has pushed PE funds to buy companies they would have skipped over in the past. Even if your company has a lower EBITDA than mentioned above, don’t ignore PE as an option.
Employee Stock Ownership Plans (ESOPs)
ESOPs are often the best way to transition ownership to employees, as it allows employees to finance the purchase of the company with pre-tax retirement savings. An ESOP allows employees to purchase shares in the company, fostering a sense of ownership and ensuring continuity. ESOPs are tax-advantaged and can be an excellent tool for maintaining a positive company culture during the transition.
Implementing an ESOP requires significant planning and resources. This isn’t something you do on your own. Instead, it requires a team approach to handle the various aspects and compliance questions. Owners must assess the business’s financial health to ensure it can support the costs of establishing and maintaining the plan. Additionally, ongoing employee education is essential to help staff understand and embrace their new roles as shareholders.
ESOPs are best suited for companies with EBITDA of at least $1 million and stable cash flows. Businesses with a strong employee culture and annual revenues in the $10 million to $50 million range often benefit most from this structure, as it aligns employee incentives with business performance.
Liquidation
Liquidation involves selling the company’s assets and ceasing operations. This option is typically considered when other exit strategies are not viable.
While liquidation maximizes the value of tangible assets, it often results in a lower overall valuation compared to a going-concern sale. It can also have significant implications for employees, customers, and suppliers, making it a less desirable option unless necessary.
Liquidation is most applicable to businesses with declining revenues or negative EBITDA, where operational viability is no longer sustainable. Asset-rich companies, such as those with significant real estate or machinery value, are better positioned to maximize returns in a liquidation scenario.
Step 5: Tax Implications and Mitigation Strategies
Today’s top tax rate is 37% and it will likely increase to 39.6% next year.
Long-Term Capital Gains are taxed at a lower rate, up to 20% depending on household income.
The difference between the two provides an opportunity for tax savings when you’re ready to sell your business. The more gain that is taxed at capital gains rates, and not as ordinary income, the more you’ll save.
Likewise, keep in mind $13,990,000. If you have more than $14 million in assets (across investments, real estate, business, and everything else), you’re above the current estate tax exemption threshold. If you’re married, you can double the estate exemption, so you won’t need to worry until you’re near $28,000,000. If you are close to these numbers, I recommend speaking to an estate planning attorney with experience handling taxable estates. There are many strategies but they typically require professional assistance.
Oh, and keep an eye on Congress in 2025. Unless certain provisions of the 2017 Tax Cuts and Jobs Act are extended, the estate tax exemptions I mentioned above will be cut in half.
The current provisions are set to expire at the end of 2025, at which point the estate tax exemption will be lowered to pre-TCJA levels and the top ordinary income tax rate will increase to the 39.6% I mentioned earlier.
Here's a list of the strategies I use most often. This list isn’t comprehensive, but it will give you a good understanding of the available options.
1. Capital Gains Tax Optimization
Capital gains taxes, which apply to the sale of business assets or shares, can significantly reduce net proceeds. Structuring the sale as a long-term capital gain, rather than ordinary income, typically results in lower tax rates. This strategy is ideal for businesses that have grown significantly over time, particularly those with ownership exceeding one year.
2. Installment Sales
In an installment sale, the buyer pays the seller over time, spreading the tax liability across multiple years. This approach can lower the seller’s overall tax burden by keeping annual income below higher tax brackets. Installment sales work well for businesses with steady cash flow and buyers who require financing assistance.
3. Section 1202 Exclusion (QSBS)
For qualifying small business stock (QSBS), Section 1202 allows for significant exclusion of capital gains taxes upon sale, often up to $10 million or 10 times the stock’s adjusted basis. In plain English, this means that up to $10 million in gains can be realized tax-free. This strategy is particularly advantageous for C-corporations held for at least five years.
4. Charitable Remainder Trusts (CRTs)
CRTs enable owners to transfer business interests into a trust, reducing taxable income while generating annual payments for the owner or beneficiaries. This option is ideal for owners with philanthropic goals, as it allows a portion of the proceeds to benefit charity while deferring taxes.
5. Employee Stock Ownership Plans (ESOPs)
ESOPs not only foster employee ownership but also offer tax advantages. Sellers may defer capital gains taxes by reinvesting proceeds into qualified replacement property. This strategy is best suited for owners who want to maintain the company’s legacy while achieving tax efficiency.
6. Tax-Free Reorganizations
In a tax-free reorganization, owners exchange business equity for stock in a larger corporation, deferring tax liabilities. This strategy is particularly effective in mergers or acquisitions where the goal is long-term growth rather than immediate liquidity.
7. State Tax Optimization
Relocating the business to a state with lower or no capital gains taxes before a sale can lead to significant savings. This strategy requires careful planning and compliance with residency requirements but can be beneficial for high-value transactions.
8. Family Limited Partnerships (FLPs)
FLPs allow business owners to transfer ownership interests to family members while retaining control over operations. FLPs provide significant estate tax advantages by leveraging valuation discounts for minority ownership. This is an effective strategy for high-net-worth individuals aiming to preserve wealth within the family.
9. Intentionally Defective Grantor Trusts (IDGTs)
IDGTs enable owners to transfer appreciating assets to heirs while minimizing estate taxes by freezing the value of the assets at the time of the transfer and excluding future appreciation from the taxable estate, IDGTs work best for businesses with high growth potential or significant valuation increases expected post-sale.
10. Minority Ownership Discounts
By gifting minority shares of the business to family members or trusts, owners can take advantage of valuation discounts for lack of control and marketability. This strategy reduces the overall taxable value of the transferred assets and is ideal for multi-owner businesses or family transfers.
11. Grantor Retained Annuity Trusts (GRATs)
GRATs allow owners to transfer future appreciation of business assets to heirs while retaining annuity payments for a fixed term. GRATs are highly effective for businesses with substantial anticipated growth and low-interest rate environments, as they reduce estate taxes while maximizing wealth transfer.
When to Use These Succession Planning Tools:
· Wealth Preservation: FLPs and GRATs are ideal for owners focused on estate tax reduction and preserving wealth for future generations.
· High Growth Potential: IDGTs and GRATs are particularly advantageous for businesses with significant expected growth.
· Complex Family Structures: Minority ownership discounts and FLPs help navigate fairness and tax efficiency in family transitions.
· Philanthropic Goals: CRTs align with owners aiming to combine wealth transfer with charitable contributions.
Step 6: Transition Planning
To get the most from your business, you must set your successor up for success. Transition planning is the way to do that, post-sale or transfer. This involves preparing successors, aligning the business for the future, and mitigating risks associated with leadership and operational shifts.
1. Successor Training and Development
Identifying and developing the right successor is crucial. Whether the successor is a family member, an internal manager, or an external buyer, training programs should focus on leadership skills, financial acumen, and operational understanding. For example, assigning a future leader to oversee major projects or participate in strategic planning sessions helps build confidence and competence.
Metrics such as employee retention rates under their leadership or the ability to meet key performance indicators (KPIs) during their training period can help evaluate readiness. Providing mentorship opportunities with current leadership also ensures a smoother transition.
2. Communication Strategies
Effective communication minimizes disruptions and uncertainty. Stakeholders, including employees, suppliers, and customers, need clear information about the transition plan. For example, hosting town hall meetings or issuing detailed announcements can reassure employees about job security and company direction.
Transparency in communication can also strengthen relationships with customers and suppliers, who may be concerned about potential changes in service or operations. Regular updates throughout the transition process help build trust and maintain continuity.
3. Operational Independence
A key element of transition planning is ensuring the business can operate independently of the owner. This involves delegating key responsibilities to the management team and documenting critical processes. For instance, creating a comprehensive operations manual that outlines workflows, supplier relationships, and compliance requirements reduces reliance on the outgoing owner.
Key metrics to track include the number of decisions handled autonomously by the management team and the stability of operations during the transition period.
4. Risk Management
Mitigating risks during the transition is essential to preserving business value. This includes addressing potential legal, financial, and operational risks. For example, ensuring contracts are transferable and conducting thorough due diligence on potential successors can reduce liabilities.
Additionally, implementing contingency plans for unexpected events, such as economic downturns or disruptions in leadership, ensures the business remains resilient. Insurance policies, Buy-Sell agreements, and robust financial reserves are also critical components of a solid risk management strategy.
5. Monitoring and Evaluation
Regularly assessing the progress of the transition plan ensures objectives are being met. Establishing a timeline with milestones, such as completing successor training or achieving specific financial targets, helps measure success. Engaging external advisors, such as consultants or legal professionals, provides an unbiased evaluation of the transition process.
Tracking metrics like revenue stability, employee satisfaction, and customer retention during and after the transition can indicate the effectiveness of the plan and highlight areas for adjustment. Regular feedback from stakeholders ensures the transition remains aligned with the business’s long-term goals.
Step 7: Executing the Exit Strategy
Executing the exit strategy is the culmination of meticulous planning and preparation. This phase requires seamless collaboration among team members, rigorous monitoring, and the proper execution of critical legal documents to ensure a successful transition.
Monitoring the Exit Plan
Active monitoring ensures that the exit plan remains on track and aligns with the owner’s goals. Key steps in monitoring include:
Establishing Milestones:
Create a timeline with specific milestones, such as finalizing valuation, selecting a buyer, and executing legal documents.
Assign responsibilities for each milestone to ensure accountability.
Regular Progress Meetings:
Schedule weekly or bi-weekly meetings with the advisory team to review progress, address challenges, and update strategies as needed.
Use these meetings to ensure that all team members are aligned and informed.
Tracking Metrics:
Monitor key performance indicators (KPIs), such as buyer interest levels, operational stability, and financial performance, to gauge the plan’s effectiveness.
Adjust the strategy if metrics fall below expectations.
Critical Legal Documents
The execution phase requires the preparation and signing of several key legal documents. Each document has a specific purpose, and its preparation involves coordination among team members:
Letter of Intent (LOI):
Outlines the preliminary terms of the sale, including purchase price, payment terms, and contingencies.
Typically prepared by legal counsel with input from the broker or investment banker.
Purchase Agreement:
A binding contract that details the final terms of the sale, including representations, warranties, and indemnifications.
Drafted by legal counsel with extensive input from the tax advisor and financial advisor to ensure optimal structuring.
Non-Disclosure Agreement (NDA):
Protects sensitive business information shared during negotiations.
Standardized NDAs are often prepared by legal counsel early in the sale process.
Asset Transfer Documents:
Include deeds, titles, and intellectual property assignments to transfer ownership of assets to the buyer.
Prepared by legal counsel and reviewed by the operations team to ensure accuracy.
Employment Agreements or Non-Compete Clauses:
Define post-sale roles for the seller or key employees, if applicable.
Prepared by legal counsel and tailored to the terms of the sale.
Tax Election Forms (e.g., IRS Form 8594):
Allocate the purchase price among assets for tax purposes, affecting the seller’s tax liability.
Prepared by the tax professional in collaboration with the legal team.
Corporate Resolutions:
Document board or shareholder approval of the sale, as required for corporate governance.
Prepared by legal counsel.
Escrow Agreements:
Define terms for funds held in escrow, such as contingencies or performance guarantees.
Drafted by legal counsel with input from the broker or banker.
Finalizing the Exit
Once all documents are signed and funds are transferred, the final stage involves:
1. Post-Sale Transition Support:
Assist the new owner with onboarding and operational integration to ensure a seamless handover.
2. Financial Closure:
Reconcile accounts and distribute proceeds as outlined in the purchase agreement.
3. Owner Exit:
Finalize the owner’s withdrawal from active involvement, whether immediate or phased, based on the sale terms.
Section 3: Success Planning Examples
1. Internal Transition Success
Example: Transitioning a Family-Owned Manufacturing Business
The Smith family owned a precision tool manufacturing company specializing in high-accuracy components for aerospace and automotive clients. Over 40 years, the business had grown steadily, employing 75 people and generating $10 million in annual revenue with consistent EBITDA margins of 18%. The company’s reputation for reliability and precision made it a preferred supplier for long-term contracts.
When the founder, John Smith, decided to retire, he opted for a family succession plan, transitioning ownership to his daughter, Sarah, who had worked in the company’s marketing department for 10 years.
Key Steps:
· Preparation: John began planning five years prior to his retirement. This included training Sarah in leadership and operations, as well as enrolling her in executive business courses to build her financial and strategic acumen. He also hired a management coach to help Sarah develop decision-making and team-building skills critical for leading the company.
· Valuation and Structuring: A professional valuation established the company’s worth at $8 million, and a combination of gifting and seller financing was used to transition ownership while minimizing tax liabilities. The gifting portion utilized annual gift tax exclusions, while seller financing ensured John received regular income during retirement.
· Governance Improvements: The family implemented a formal board of advisors, including external industry experts, to provide strategic guidance and avoid conflicts. This structure ensured that decisions were not solely influenced by family dynamics and were aligned with long-term business goals.
Outcome:
Under Sarah’s leadership, the company modernized its digital marketing strategy and streamlined production processes, resulting in a 10% increase in revenue over two years. Employee satisfaction scores rose by 15% after she introduced professional development programs and new team-building initiatives. The smooth transition also reinforced the company’s reputation among clients, retaining all major contracts.
2. External Sale Challenges
Lessons Learned from Selling to a Strategic Buyer
XYZ Plastics was a regional plastics manufacturer that specialized in custom injection molding for the consumer goods industry. The company employed 120 people and generated $18 million in annual revenue, with EBITDA margins averaging 12%. Its competitive advantage lay in its proprietary molds and ability to deliver large-scale orders quickly.
The owners decided to sell to a larger competitor to capitalize on favorable market conditions and ensure liquidity for retirement.
Key Challenges:
· Due Diligence Delays: Gaps in documentation, including incomplete records of intellectual property ownership and outdated contracts with suppliers, extended the due diligence process by six months. This delay created uncertainty for both parties and increased transaction costs.
· Cultural Integration Issues: Post-sale, cultural clashes between the two organizations led to higher-than-expected employee turnover, including the departure of key managers. Differences in operational practices and management styles contributed to reduced morale among employees.
· Earnout Complications: Part of the sale included an earnout tied to achieving specific revenue targets. Unforeseen market conditions, including raw material shortages and increased competition, reduced revenue, resulting in disputes over earnout payments and strained relationships between the seller and buyer.
Lessons Learned:
· Prioritize thorough documentation and conduct pre-sale audits to identify and address gaps. Engage legal and compliance experts early to streamline due diligence.
· Align cultural values and expectations during negotiations to ensure smoother post-sale integration. Conduct joint workshops or team-building sessions pre-sale to foster collaboration.
· Clearly define and stress-test earnout terms to avoid disputes. Include contingency clauses to address external market factors beyond the control of either party.
Despite these challenges, the sale was ultimately successful, with the owners receiving a 20% premium over the valuation. However, the process highlighted the importance of preparation and cultural alignment in ensuring a smooth transition.
3. Innovative Models of Exit Planning
ESOP Transition to Employee Ownership
A mid-sized metal fabrication company with a long history of supplying parts to heavy equipment manufacturers opted for an Employee Stock Ownership Plan (ESOP) to transition ownership. The company employed 200 people and generated $25 million in annual revenue, with EBITDA margins of 15%. Known for its strong employee culture and low turnover rates, the company’s leadership believed an ESOP would preserve its legacy while ensuring operational continuity.
Implementation:
· Valuation and Structuring: The company was valued at $20 million. A professional ESOP advisor structured the transition, with the ESOP trust purchasing 70% of the company’s shares using a combination of bank financing and seller financing. This arrangement allowed the founders to receive liquidity while deferring capital gains taxes.
· Employee Engagement: To ensure buy-in, the company held informational sessions explaining the ESOP’s benefits and employee responsibilities as new owners. These sessions included financial literacy training to help employees understand how their efforts directly impacted the company’s performance and their financial rewards.
· Leadership Continuity: Key managers remained in their roles, providing stability during the transition. The founder also stayed as a consultant for two years to mentor the leadership team and guide strategic initiatives.
Outcome:
Within three years, the ESOP increased productivity by 20% due to heightened employee engagement and ownership incentives. Profit-sharing distributions from the ESOP trust further motivated the workforce, resulting in a 15% reduction in turnover. The company also achieved a 10% growth in revenue by expanding its client base, driven by employee-led innovation initiatives. The founders successfully exited with financial security, and the company maintained its culture and operational excellence.
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