THE ˜ STAGES VALUE MATURITY - LEA Global 5 Stages of... · 2018-01-20 · Three), you can use this...

THE 5 STAGES OF VALUE

MATURITY

THE FIVE STAGES OF VALUE MATURITY // 2

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INTRODUCTIONYou’ve spent years building a successful business. Your journey has been rewarding in many re-spects—but if you’re like most business owners, it hasn’t been easy. You’ve put in very long hours, incurred substantial risks, encountered bumps small and large, detoured down unexpected paths, missed far too many soccer games, piano recitals and other family events, and perhaps faced existen-tial threats on several fronts.

Through it all, you endured, and your business stands as a testament to the success of you and your team. That said, no business can afford to stand still. Growth and evolution are imperatives for any business, including yours. If your business is poised at the threshold of its next growth chapter, and you’re ready for the next chapter in your life, the time to build value and plan for your ultimate transition may be at hand.

All business owners seek maximum value for their business at the time of their exit. Yet far too many face a range of very unpleasant surprises when they decide to sell, some of which include:

• A sharp disconnect between their perception of the business’ value and its actual value• A realization that the market into which they will sell is a buyer’s market, thus limiting their leverage—

and possibly lowering their multiples• A lack of resources – or simply the wrong circumstances – to enable the kind of transition they most

desire • Limited knowledge about the range of exit options, and consequently, an inability to pursue the right

one based on timing and/or resources• Any of the dreaded “Five Ds”: Death; Disability; Divorce; Disagreement; and Distress (for more on

the Five Ds, see Stage Two)

You, business owner, must avoid these surprises. Thankfully, you can avoid these surprises, given adequate time and proper planning.

This e-book is a synopsis of the teachings we impart in our Owners’ Roundtable series. In it, we pres-ent sound strategies and practical techniques to build a system that positions your business for a suc-cessful transition in good times or bad. Our ultimate goal is your ultimate goal: Maximize your business’ value—and by doing so, exit on your terms.

Our e-book is organized in five chapters that correlate to the Five Stages of Value Maturity:


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Table of Contents

Stage One: Identify Value .............................................................................................4

Stage Two: Protect Value ..............................................................................................7

Stage Three: Build Value ............................................................................................10

Stage Four: Harvest Value ..........................................................................................14

Stage Five: Manage Value...........................................................................................19

Conclusion ...................................................................................................................23

We hope you find the information in this e-book useful as you think about the future of your business—as well as your own future, and that of your loved ones. We welcome the opportunity to answer ques-tions, be of service, or discuss your issues and concerns—please refer to the conclusion for Skoda Minotti contacts and contact information.

Ready to maximize value? Let’s get started.


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STAGE ONE: Identify value — Know what your business is worth and how it comparesConsider ABC Company, a hypothetical middle-market supplier of plumbing equipment to commercial contractors. This family-owned business was founded 70 years ago and is now in its third generation of leadership. The current President and CEO is in his middle 60s. He started in the stock room as a teen-ager and ascended the ladder to eventually assume leadership when his father retired in the 1980s.

Now, he’s looking ahead to the next phase of his life and hoping it includes travel, quality time with the grandkids, maybe a little golf and definitely some well-earned downtime. He has two grown children currently in the business, and two unrelated officers with their eyes on the top spot. Revenues are steady, but not necessarily growing at an appreciable rate. The business is cyclical, certainly not reces-sion-proof, and prone to market variances of many origins.

ABC Company cannot simply maintain the status quo and hope to survive into the foreseeable future. It must grow in ways that diversify its product offerings, expand its customer base, and mitigate risk during downturns. This necessitates investment, which in turn, involves debt. Knowing this, the current owner has some decisions to make:

• Does he want to incur additional debt – and the corresponding risk that comes with it – at this stage in his life?

• How do he and his team plan to pursue growth? If they haven’t adequately planned for it yet, how and when will that occur?

• What’s his preferred exit strategy from a transactional standpoint—family transition, management buyout, employee stock ownership plan (ESOP), third-party sale, recapitalization, or perhaps even an orderly liquidation?


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• If he wants to keep the business in family hands, which child should take over, and why? How will he manage reaction from the officers, each of whom seeks to take the reins themselves?

There are other questions, of course. Lots of questions. But answers to any and all questions related to business transition are predicated on one variable: value.

At Skoda Minotti, we position Identify Value as our first of five steps so that you as a business owner have a baseline measurement from which to track value over time. As you endeavor to Build Value (see Stage Three), you can use this baseline to revalue your business based on your success.

Exit planning is business strategy.

This tenet applies to all stages of value maturity—particularly the first stage of Identifying Value. We preach it constantly because it makes sense on so many levels. Exit planning is all about building a management system to keep the organization focused on building value that one day can be extracted, harvested and monetized. Think about it: 80 to 90 percent of most business owners’ net worth is tied up in their business; if you have a financial advisor helping you meet your retirement goals, why wouldn’t you seek to enhance and maximize such an outsized share of your net worth through the help of a Certified Exit Planning Advisor (CEPA)?

It seems logical. Yet the numbers suggest otherwise. Fifty-six percent of business owners say they know the value of their business—yet only 18 percent have had that business formally valued by a valua-tion expert in the last two years. Getting an accurate read on the value of one’s business is crucial for estate planning purposes, as well as planning accurately for a post-exit lifestyle, and addressing all of the relevant questions that surround business transitions.

In pursuing valuation, you may find, for example, that the business you thought was worth $4 million is actu-ally worth $2 million. Suddenly, the windfall that you hoped would fund your post-exit life at a certain level is smaller than you anticipated. While the news may or may not be good, getting an accurate gauge on value at least allows you to make informed decisions. Should you continue to run the business until its value in-creases? Reposition the business to pursue new channels and opportunities for growth? Make other adjust-ments necessary to build its value over some period of time? Adjust your own post-exit expectations?

The choices are yours to make, but far too many owners view their businesses based on their feelings about what they think is important. Instead, they – and you – should start thinking about how potential buyers view businesses. Thinking like a buyer will better help prepare your business for sale by reducing risks buyers might uncover. Knowing the true value of your business is also the first step toward driving organizational

DID YOU KNOW?95% of M&A professionals

believe a business owner’s unrealistic expectations of

company value are the biggest obstacle to sale.


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behavior accordingly, connecting business priorities to value, and ultimately, moving in the right direction. Remember…


Questions to Ask, and Process We Undertake TogetherWhen we at Skoda Minotti work with business owners at the front end of their value maturity journey, we begin by asking them to ask themselves fundamental questions:

• What’s the goal?• What’s next?• How much do I need?• How much will the business contribute?

From there, we undertake a Business Attractiveness Assessment and Exit Planning Readiness Assess-ment. These assessments are exhaustive in their breadth and depth, encompassing 150 questions—in-cluding employee and management issues, management systems and forecasts, company documenta-tion, product strategies and scoring personal, financial and business value factors.

Through this process of dual-phase assessment, we are able to correlate assessments to the financial analysis to determine the range of value—specifically manifested through two scores: (1) an attractive-ness score, and (2) a readiness score. These two scores encompass deliverables that include a specif-ic and qualified list of personal, financial and business strengths and weaknesses; present and potential values; and prioritized action plans.

Two final notes about Identify Value:

1. Many business owners maintain a laundry list of initiatives they believe will take their business to the next level. However, the same excuses always arise as to why those initiatives are never implemented—and those excuses usually tie back to the daily demands of running a business. Our process is proven to help owners prioritize and determine an integration plan to make their initiatives a reality.

2. At Skoda Minotti, we recommend that businesses be valued annually. This delivers the most accurate and up-to-date picture of a business’ health and value, which of course, enables decisions to be made that are based on the latest information. It should be noted that subsequent valuations are less costly than the first, since the template has already been established.

In Stage Two, we explore the concept of Protect Value.


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STAGE TWO: Protect value — De-risk your business to protect its current valueLet’s look back at ABC Company, our hypothetical family-owned plumbing equipment supply business. The current President and CEO seeks to transition ownership and retire—yet he must address big is-sues first in order to make the best decisions for himself, his family and his company.

As we mentioned in Stage One, his first task is to Identify Value. Once the true value of his company is established, he can then embark on the next leg of his value maturity journey: Protect Value.

This is critically important, for there’s little sense in understanding what our business owner has unless he takes proactive steps to protect it. For him – and for you as a business owner – protecting value en-tails addressing risk in three distinct areas – what we term three legs of the stool— business, financial and personal. Essentially, your challenge entails:

1. Mitigating risk (i.e., heading off potential issues before they occur)2. Addressing and minimizing current risk-related issues

The ultimate goal of these steps is de-risking your business, which makes it a more attractive target in an increasingly crowded market. After all, the more risk that your business bears, the less someone will be willing to pay for it. Conversely, a business that’s viewed as less risky will command a higher price tag.


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It’s worth noting that business owners, and especially entrepreneurs are, by their very nature risk tak-ers. Most realize bearing risk to some degree, and then figuring out the right balance between risk and reward with each action they take, is part of business. What we’re talking about here is different—and we think business owners need to think differently about risk as a result. Specifically, they must con-sider how a potential buyer might perceive a risk that they themselves don’t feel burdened by. Will that risk be so undesirable that it could steer them away from a potential acquisition? It’s a question that needs to be asked, and it necessitates a mindset that’s quite different from the one that helped build that owner’s success over time.

In our Owners’ Roundtable series, we ask our owner participants to identify risks related to each of the three legs of the stool. Some common examples include:

Business: • Operations are too owner-dependent• Customer concentrations may be overweighted in one or more areas• Key employees could leave• Technology may need upgrading, may break down or may be compromised, which could result in a

data breach or loss of data• The market into which the company sells may be declining• The product and/or service mix may not be adequately diversified

Financial:• Economic pressures or changes may affect operations, necessitating unforeseen capital

expenditures, or even penalties• Current business debt may not be structured under market-appropriate conditions • Aging property, plant and equipment could impede production and processes and make the

business appear less valuable, since replacements and upgrades could potentially be factored into an offer price

• Potential tax issues that may represent a business risk• Generally, 80 percent of an owner’s net worth is in the business

Personal: Any or all of the 5 Ds:• Death – Obviously, death of a business owner, or even a key employee, can affect a business to

varying degrees—from mildly to profoundly. If the owner of hypothetical ABC Company dies, either suddenly or as the result of an illness, is the business prepared to continue its daily operations?

• Disability – This also can impact a business—particularly if the owner or a key employee is disabled on a long-term, or even permanent, basis.

• Divorce – For an owner who is in the process of getting divorced, significant time and energy can be diverted from day-to-day business operations. The process is inherently stressful, which can lead to health problems. And from a financial standpoint, the resulting impact can have negative repercussions throughout a privately held business.


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• Disagreement – When one or more business owners disagree – over anything from strategic direction to legal issues – time and energy are diverted, and a business can easily go astray as a result. Of course, disagreements and disputes can lead to legal challenges, which are costly, stressful and time-intensive.

• Distress – The business may be distressed due to a flat or declining industry, a new “mousetrap” by the competition, or the loss of a large customer.

Once risk issues are identified, we then ask our owner participants what they are doing to mitigate those risks—and equally important, how they are getting their team involved in that process.

We also bring in outside experts to discuss legal risk, along with a professional to discuss overall enter-prise risk management and a former business owner who shares their experience.

The End Goal: A De-Risked Business

The de-risking stage is designed to be completed over a two- to six-month time frame. To get started, ask yourself what specific risks correlate to each of the three legs of your stool. Jot your thoughts down on paper, then review it when you’re done to get a better sense of your risk landscape.

In Stage Three, we explore the concept of Build Value.

DID YOU KNOW?50% of business

transitions are unplanned due to the 5 Ds.


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STAGE THREE: Build value — Act strategically to get the business where it needs to beAfter you’ve identified the actual value of your business, determined its target value (i.e., the amount needed to achieve your retirement goals) and taken steps to protect its value, the time has come to build value. Building value is a necessary step in the value maturity process for every business owner, under every conceivable scenario.

Need proof? Consider this: We currently are in the midst of an unprecedented generational transfer so-cially and economically. There is a tidal wave of business exits on the horizon—and it’s drawing nearer very quickly. Early baby boomers have already reached retirement age – they’ve already started tran-sitioning their businesses – and the tail end of this generation will get there in a few short years. When that occurs, the businesses they and their slightly older baby boomer brethren own – roughly four mil-lion – and the combined value of those businesses – $10 trillion – will flood the market. That presents a near-unprecedented opportunity for buyers. Yet it will put incredible pressure on sellers to position their companies as attractively as possible.

If you’re a business owner, and you’ve read this far, then you probably realize that this scenario is, to some degree, in your future. Therefore, if there’s any delta between your company’s actual and target values – large or small – you’ll need to build value to close or eliminate the gap.


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If you’re lucky enough that your business’ actual value is also your target value, you’ll still need to build value so that you and your team can facilitate a transition under the time frame and conditions you de-sire. Additionally, buyers like to invest in growing companies. There are few buyers who are interested in buying companies only to keep them at the same levels of production and profitability. The value of the business may work for the business owner; however, if growth is flat over the prior two to three years, then buyers could be scared away.

Building value occurs over a longer time horizon—usually years. Yes, there are short-term actions you and your team can implement to build value in smaller, tactical ways. But broad, strategic actions are usually relied upon to increase cash flow, and ultimately, the multiple you’ll receive for the business. In our Owners’ Roundtable series, when we discuss building value, our dialogue often centers on in-tangible value. For example, let’s say our hypothetical ABC Company has a multiple of six, but maybe only two of those six points are represented by its tangible assets (e.g., property, plant and equipment), whereas the remaining four points are representative of intangible value.

What comprises intangible value? Also called intellectual value, intangible value is represented by the Four Cs (i.e., four types of capital):

• Human capital (e.g., employees, and a business’ ability to recruit, develop and retain them)• Customer capital (e.g., relationships, contracts)• Structural capital (e.g., processes, technology and their connection to personnel expertise)• Social capital (e.g., culture, brand)

When it comes to valuing a business, intangible value is often more highly rated than tangible value. In this example, ABC Company’s owner is fortunate to have more assets (i.e., intangible assets) of higher value. Now, as he seeks to build value, he can choose to enhance his existing intangible assets; protect them; or further develop intangible assets.

Certainly, our owner and his team may decide it’s strategically prudent to enhance tangible assets to accomplish a strategic objective. But generally speaking, most businesses can develop and improve value if their focus is on increasing intangible value.

DID YOU KNOW?70 to 80% of businesses put on the market don’t sell.


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Remember: Exit planning is not a future event—it’s a current and future process. As you seek to build value in your business, keep these guidelines in mind:

• Be disciplined in your approach, and plan accordingly. We recommend 90-day cycles, or “sprints,” that focus on key growth initiatives and hold team members accountable throughout the process. Once your first 90-day sprint is over, assess your progress and re-evaluate your program. You’ll probably determine that subsequent 90-day initiatives you’ve planned for are still viable and should proceed. Or, you may determine based on your progress under the first 90-day sprint that subsequent strategies are no longer priorities for your business. Leave yourself some flexibility to adjust your activities as needed.

• Document all your processes and procedures to ensure that intellectual capital stays with your business. Some employees may handle key processes within your operation; if they leave, you can’t put yourself or your company in the position of having that knowledge walk out the door. Potential buyers want assurances that processes and procedures are documented; this eliminates surprises for them, and validates the overall value that is placed on the business.

• Execute relentlessly. When choosing and setting priorities, make sure all details are accounted for. Who will be responsible? What are your options? What are the deliverables? Where will the resources come from? What are the risks? And what are the milestones that will demonstrate you’re on track? Execution requires discipline grounded in action. Following sequential steps to getting things done keeps you moving—and moving in the right direction. Taking the time to organize before you execute will help clarify your capabilities and ensure you are working on the right things.


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At the end of the day, you must be able to measure your progress in terms of how your business’ value increases based on the action steps you take in your process of building value. In the case of ABC Company, for example, its current multiple of six could be increased by a half point or point – poten-tially representing several million dollars – in the intangible value side of the equation by undertaking a company-wide initiative of documenting processes. Or, something else – perhaps a patenting initiative – may add additional intangible value points. Whatever the case, this process is a measurable one; the strategy must be clearly articulated and pursued with vigor so that an accurate measurement can be taken once it’s completed.

One final note: We’ve talked a lot about planning and timing. If your ultimate goal is to sell your busi-ness, then the amount of time you should remain on board post-close can be greatly affected by your structural capital. If that capital is poor, then the buyer will need time post-close to acclimate themselves to your processes. This will require more of your time post-close and hinder you from starting the next chapter of your life. Strong structural capital can help a business owner transition out of the business more quickly.

In Stage Four, we explore the concept of Harvest Value.


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STAGE FOUR: Havest value — Identify exit/succession optionsLet’s revisit our hypothetical ABC Company, the family-owned plumbing equipment supply business. Having determined that he is ready to transition ownership and move into the next phase of his life, the owner has taken several subsequent actions:

1. He first identified the true value of his business, then measured that against his post-ownership income needs, quantified a potential gap, and worked with his team on strategies to narrow or eliminate the gap.

2. He proactively addressed existing issues of risk as best he could, and worked to identify and understand potential risks in the near and long term.

3. He and his team acted on the strategies they devised to build business value – particularly intangible value – in order to increase the company’s multiple and enhance its attractiveness as a purchase target.

It’s likely you’ll face some of these same questions as you undertake your process of value maturity. If and when you transition through these first three phases of value maturity, then you’ll arrive – as our hypothetical ABC Company owner has – at the fourth stage: Harvest Value.

DID YOU KNOW?Two-thirds of business

owners surveyed do not know all their exit options.


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In our Owners’ Roundtable series, we often tell participants that exit readiness is not the decision to sell. It’s a state of fact, not of mind. Determining your exit readiness, therefore, comes down to two considerations:

1. Are you as the owner ready?2. Is your business ready?

Assuming your answers to these questions based on the Exit Planning Readiness Assessment (see page 6) is ‘yes,’ you then need to consider specific options by which you can transition your business. Transition options are categorized as either internal or external. A brief explanation of each option type follows.

Internal optionsFamily, or intergenerational transfer (if applicable). As the name suggests, a family or intergenera-tional transition occurs when ownership is transferred to a family member or members. Often, direct heirs – usually children – are the transition beneficiaries.

Pros: • A transition to a family member or members keeps the business you’ve worked so hard to build in

your family’s hands. • Oftentimes, it’s a lower-cost transaction, meaning there are lower legal and professional expenses. • Less disruption.

Cons: • Family dynamics may be a known variable to some degree, but they’re nonetheless unpredictable.

How family members react before, during and after a transition could strengthen familial bonds—or break them entirely.

• Lower sales price.• Tradition may outstrip good strategy.


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Interestingly, research has found that 50 percent of business owners want to exercise this intergenerational option—yet in reality, only about 30 percent actually do. If a family transfer is your ultimate goal, then that is not an excuse to bypass the first three stages of value maturity. If nothing else, would you be comfortable passing on your current business risks to your family members? We think the likely answer is “No.”

Management buyout (MBO) Pros:

• MBOs are inherently designed to preserve human capital, at least in the short term. • They can also be used in conjunction with a private equity purchase of a percentage of the company. • A highly motivated buyer can access additional capital.

Cons: • Generally, management tends to be relatively illiquid and doesn’t have the requisite funds to

purchase the company. • The transaction could likely be a major distraction to the business, since management’s attention is

drawn toward purchasing the business rather than operating it.• Managers are not always good entrepreneurs.

Sale to existing partners (if applicable). With this option, success is closely linked to the existence and quality of a buy-sell agreement. A well-written agreement will include appropriate valuation lan-guage and terms of payment.

Pros: • Transactions are generally less disruptive.• They’re planned.• Buyers are well informed (or should be).• The owners incur lower costs.

Cons: • They generally yield lower sales prices

than a sale to an unrelated buyer.• They can foster potential discord.• The buy-sell agreement may restrict selling

options.• Realization of proceeds from the sale are

often slower (and less).

Employee Stock Ownership Program (ESOP). In an ESOP, the company uses pre-tax borrowed funds to acquire shares from the owner, and it then contributes those shares to a trust on behalf of the employees.


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Pros:• The business stays within the “extended

family.”• Shares are purchased by the ESOP with

dollars that are deductible by the company.• The seller can defer the taxable gain on the

sale of the shares if certain circumstances are met.

• ESOP ownership by employees may cause them to “think like owners”—always a good thing.

Cons:• ESOPs are expensive to implement and

operate.• The company or the ESOP has to buy the

ESOP shares held by a departing employee.• Some companies may find it difficult to obtain

financing for a leveraged ESOP; there are a limited number of ESOP lenders.

• Without using a leveraged ESOP, it is difficult for a large shareholder to make an immediate exit from ownership.

External optionsThird-party sale. Under this scenario, an owner sells the business to a strategic buyer, financial buyer or private equity group through a negotiated sale, controlled auction or unsolicited offer.

Pros: • Third-party sales usually net the highest prices of any internal or external options• More cash is included up front.• The business is refreshed and can grow through new talent, new ideas and new energy.

Cons: • Third-party sales tend to be long in duration (e.g., 9-12 months), which can prove to be emotionally

draining for owners.• They can be a distraction to the business and can lead to a loss of focus.• They raise privacy concerns.• They carry the highest cost of options.


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Recapitalization/Refinance. Under this scenario, the owner finds new ways to fund the company balance sheet. Essentially, this entails bringing in an equity investor or lender to act as a partner in the business. The owner can then sell a minority or majority position.

Pros:• It allows a partial exit.• It reduces owner risk, and diversifies asset concentration.• It provides capital for growth.• It allows for a “second bite at the apple.”

Cons:• A recapitalization/refinancing is not a clean break; it compels continuing accountability from an

owner to his/her partner(s).• It often results in a loss of control.• It causes a cultural shift.

Orderly liquidation. While this generally isn’t the first option for most sellers, it works when the asset value exceeds the going concern value, or when the sum of the parts exceeds the whole (i.e., when as-set division nets value).

Pros: • Liquidations are usually pursued as an efficient means of selling off assets. When that’s the primary

objective, it represents an effective option.• They are generally less expensive than most other transition options.

Cons:• Liquidations usually net sellers less money than other options.• They produce no money for goodwill.• They can be difficult emotionally for the seller and also can carry stigmas that may or may not be of

concern to the seller.

As you can see, an owner considering transition has big decisions to make when the time comes to Harvest Value. For your business, we encourage you to think through your options; consider the pros and cons of each; and weigh each option against your business, financial and personal goals.

In Stage Five, we explore the concept of Manage Value.


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STAGE FIVE: Manage value — Secure your future income, and the lifestyle you desireThe hypothetical owner of ABC Company is nearing the end of his ownership journey. Utilizing knowl-edge from our four preceding chapters, he has:

1. Identified the true value of his business, then measured that against his post-ownership income needs, quantified a potential gap, and worked with his team on strategies to narrow or eliminate the gap.

2. Proactively addressed existing issues of risk as best he could, and worked to identify and understand potential risks in the near and long term.

3. Acted in concert with his team on the strategies they devised to build business value – particularly intangible value – in order to increase the company’s multiple and enhance its attractiveness as a purchase target.

4. Chosen the specific option by which he can transition his business, position it the way he sees fit and harvest his desired value.


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This brings him (and us) to Stage Five of the Five Stages of Value Maturity: Manage Value. Admittedly, this is a bit of a misnomer; a more appropriate title would be Preparing to Manage Value, for even though it’s the fifth of five stages, you as a business owner should be prepar-ing to manage value throughout your entire value maturity process.

What exactly is being managed? The value of your business, certainly; but the primary goal in Stage Five is to focus on management of your personal financial matters as well. Intrinsic to this are key es-tate planning and financial planning tasks, which are included in the checklist below:

• Review estate documents and update as needed: Will

Revocable trust (i.e., A/B trust structure, including family trust and marital trust)

Financial power of attorney

Health care power of attorney

Living will

• Review insurance policies: Determine appropriate coverage amounts for both life and disability insurance

Beneficiary designations – verify that these are in sync with estate documents

Review policy earnings performance for permanent policies

• Review all retirement account / pension beneficiary designations – verify that these are in sync with estate documents

• Retitle assets to avoid probate and maximize the use of estate exemptions Assets passing through probate are public record

Avoiding probate helps to limit professional fees during the estate administration process

• Develop a detailed budget, including current cash inflows and outflows• Prepare a personal net worth statement that reflects all assets and liabilities• Develop an investment policy statement• Undertake a global investment asset allocation review with your financial advisor. Include as

part of this a long-term growth / long-term cash flow analysis• Determine your investment allocation targets and who will provide global portfolio oversight

While this may seem like a straightforward list to tackle, it is a time-consuming and thought-provoking process to work through the list and put your financial house in order.

DID YOU KNOW?80% of an owner’s

wealth is tied up in their business.


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Estate PlanningEstate documents are easy enough to understand and work with an attorney on to update. But rec-ognize that there is a tremendous amount of flexibility available in drafting will and trust documents. Important things to consider include:

• Who should handle the role of executor / trustee once you and your spouse are gone?• Who should have custody of any children who are minors? • Who should make decisions about health care for you and your spouse when you are no

longer able?• If you are married, how should assets be held for your spouse after the first death? Is an

outright distribution from the estate preferable, or should the assets stay in trust? • How do you want your heirs to receive their inheritance? Options include:

• Assets paid out directly to them at the second death• Assets paid out incrementally over time, half at age 35 and have at age 45, for example• Assets held in trust for their lifetimes with access to income and principal• If the children will be taking over the business, this adds another layer of complexity in planning the transition

• Are there any charitable goals that you want to build into the estate plan?

One other potentially important topic that we haven’t touched on above is estate taxes. If you are likely to be subject to the estate tax, it is a very important topic to consider, given the applicable 40 percent tax rate. Under the current tax law, each person can pass $5,490,000 to their heirs before the estate tax applies, or $10,980,000 for a married couple. If your assets plus any life insurance proceeds are likely to exceed this amount, there are a number of strategies available to you in order to minimize the estate tax. Note that it is an iterative process that you will need to work on over time, and the earlier you start the process, the better the results.


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Financial PlanningThe most common question we hear from business owners as they embark on building a financial plan is: If I sell, will I have enough money to live the way I want? With interest rates at historically depressed levels, in most cases it isn’t as easy as parking the sale proceeds in treasury bonds and living off of the interest. Relying on your investments to replace the income from your business can be an unnerving thought, given the uncertainty inherent in financial markets.

One of the primary goals in completing the financial planning checklist items above is to develop a good understanding of your long-term spending needs in retirement, and based on that, determine the minimum selling price for your business to fund those needs. The selling price would factor in your risk tolerance and a post-sale asset allocation that will allow you to sleep comfortably at night. Developing this financial model and knowing your minimum sale price while you prepare to sell the business puts you in the best possible position to determine when you’re ready to sell, and also to field unsolicited offers. As with estate planning, this process will take some time. Finding someone you trust to develop the model and oversee the global asset allocation is the key to this endeavor.

Develop a plan for life after business transition This is the most neglected step of the process because it’s difficult to put a structure around it. Many business owners quickly become bored with their day-to-day routine and regret selling their business after the fact. The key is to answer the question: What does happiness look like for me after I exit? You can then build out a game plan to achieve that happiness. Developing a schedule to manage your time and provide structure to your daily life can also be important. Some options for post-sale activities might include:

• Buying or starting another business• Business consulting or board of directors service• Community involvement / charitable endeavors• Hobbies

Throughout the Five Stages of Value Maturity, you should revisit your estate planning documents every three to five years in order to update and adjust them as needed. Additionally, you should revisit them when a “life event” occurs (e.g., marriage, divorce, birth or death). Estate tax planning and financial planning are much more iterative processes and will require your involvement on a continual basis. And lastly, don’t neglect to develop a plan for your life after exiting the business.

DID YOU KNOW?12 months after selling, three out of four

business owners surveyed “profoundly regretted” the decision.


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CONCLUSION – Tying it all together: five stages — one opportunityTransitioning your business is a once-in-a-lifetime opportunity. As a business owner, you owe it to your-self, your family, your employees – to some extent, even your customers and vendors – to undertake the process with the highest degree of fidelity, judgment, thoroughness and determination. If something appears too good to be true, it probably is, so don’t try to cut corners.

Getting it right the first time starts with a plan, evolves through development and deployment of a process, and concludes only as a result of relentless execution on the part of you and every member of your team. All actions must be geared toward building value in the business, and building personal value for you. Your ultimate goal should be exiting on your terms. Remember:


We hope you found this e-book helpful as you consider your value maturity landscape and think through your business transition issues. The Five Stages of Value Maturity are not rocket science; but they are systematic, process and detail-oriented, driven by meaningful data and adaptable for your unique business.

We believe your value acceleration / exit planning journey is best traveled alongside an experienced and trusted partner. We welcome the opportunity to discuss the Five Stages of Value Maturity in more detail with you, answer your questions, talk through our approach to value acceleration and exit plan-ning and discuss how we can help you prepare and execute your transition plan.

For more information, please contact Michael Trabert, CPA, CVA, CMAP, CEPA, CM&AA at 440-449-6800, email [email protected] or visit cpa.skodaminotti.com/exit-planning-services.

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