If we can determine that there is, in fact, a potential buyer for the company based on a number of attractive assets and an initial calculation of business value, we can then pursue additional constraints to realizing the preferred value.

An owner may not be satisfied by the initial calculation, believing that the company can be worth far more. This may be true. We can identify weak links or bottlenecks that impede a higher value. According to the Theory of Constraints methodology, common constraints that impede a goal (in this case, a favorable multiple for your business), can include the following:

• Physical – Equipment or other tangible items such as material shortages, lack of people or lack of space
• Policy – Required or recommended ways of working that are outmoded or restricting
• Paradigm – Deeply ingrained beliefs or habits that impede throughput
• Market – Production capacity exceeds sales

When we begin the conversation with a manufacturer — or any business owner — about some of the factors holding back a successful business transition, all four of these constraints can arise over time. An owner, for example, may strongly believe that a family member will take over the business, and that family member has not given the owner any reason to believe otherwise. This is a paradigm constraint in which the owner needs to be open to the possibility of a Plan B to mitigate the risk that this family member won’t or can’t take over.

Physical constraints may include workforce shortages or outmoded equipment; these require a longer-term and strategic approach to attracting and training talent as well as applying throughput improvements to the production floor. Market constraints may require diversification of product lines to maintain throughput that matches market cycles. And policy constraints can be addressed by looking at “how things have always been done here” to how they can be done better.

Policy constraints can be the biggest constraint to business transition planning because they tie closely to ingrained cultural beliefs about how things are done. It may require an outside advisor to identify policy constraints and to walk owners through a process of improvement. An open communication process can also support policy change when new employees come on board and are able to suggest improvements in process or production.

Of course, a big paradigm constraint is the constraint of time. Owners often say they don’t have time to think about business transition planning because they are too busy running the company. Perceived lack of time leaves owners with a lack of knowledge about their business value, which creates assumptions, misguided hopefulness and inertia. Transition planning is left to waste away in quadrant three of priorities: important but not urgent.

If time is a major constraint to business planning, the Theory of Constraints introduces the “five focusing points” to eliminate this constraint.

Beware of inertia creeping back in. Business transition planning is not a “one and done” activity. It will require regular attention over several years to monitor progress on business value improvements, delegation of owner responsibilities to experienced and stable team members, and development of contingency plans. Increasing your time to work on the plan is a big initial step toward committing to increased year-to-year profits and fair value for your business.

Continue Reading: Taking the Critical Path Towards Succession

Gary Jackson, CPA, is a tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience at Cornwell Jackson and in providing tax planning to individuals and business leaders across North Texas.

Contact him at gary.jackson@cornwelljackson.com.

One of the big assumptions, or constraints, that holds back a business transition plan is that the owner assumes there is a future demand for the company. Before you determine how much a buyer is willing to pay for your business, you have to confirm there actually is a potential buyer.

Having no future buyer is an “undesirable effect” that can be addressed and eliminated by applying the Theory of Constraints “thinking process.” If you are concerned that there may not be a potential buyer, this is your current reality. The next step in the thinking process is to identify what can be changed to attract a potential buyer. This may include things like clean accounts receivables and strong credit terms, upgraded equipment, a highly trained and stable workforce, cash in reserves, profits and a transferable customer base. Other considerations may include:

• Long-term demand for the products
• Intellectual property
• Well documented processes and systems
• High cost to enter the industry
• Easy access to debt financing and capital
• Favorable tax structure

The Theory of Constraints emphasizes that increasing throughputs is more important than cutting expenses — something that seems contrary to traditional accounting. However, throughput has no limits whereas you can only reduce expenses to zero (rarely). In addition, net profit is derived by throughput minus operating expenses. In a manufacturing environment, efficient production and improving net profits are attractive to potential buyers. By contrast, inefficient production and low expenses are less attractive.

To determine the true demand for your business in the early stages of business planning, a calculation of business value can be performed to provide a baseline from which to pursue a more formal business transition plan. It will remove the constraints of owner procrastination and assumptions by putting real numbers to your future net worth.

Continue Reading: Identifying Weak Links to a Successful Transition

Gary Jackson, CPA, is a tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience at Cornwell Jackson and in providing tax planning to individuals and business leaders across North Texas.

Contact him at gary.jackson@cornwelljackson.com.

Manufacturing firms spend a lot of time focusing on streamlined operations and leveraging technology to reduce constraints in the supply chain. What if the theories of supply chain management were applied to business transition planning? In similar ways, you must assess demand, identify and find solutions around constraints, communicate effectively and take the critical path. This article aligns supply chain theory with business transition planning to give owners and leaders common language — and maybe some motivation to get started.

At a recent three-day conference called MEP Supply Chain Optimization for Leaders, the theories presented included an overview on the Theory of Constraints. The elements of this theory, well-known to many manufacturers, took on a potential brand new application for me.

As I listened, I realized that the Theory of Constraints was the very model that could eliminate common bottlenecks for business transition planning. The Theory of Constraints (TOC), conceived by Dr. Eliyahu Goldratt, is a methodology for identifying the most important limiting factor (i.e. constraint) that stands in the way of achieving a goal. In a complex manufacturing system where multiple linked activities rely on one another for efficiency and production flow, the weakest link can take down the whole system.

Until manufacturers focus on eliminating the main constraint and pursuing a critical path toward improvement, the system remains inefficient and profits are limited. In the same way, bottlenecks in business transition planning limit success.

After years of working with intelligent and successful manufacturers, I can safely say that owners are the primary bottleneck to a successful business transition and the profits that they deserve. They are all familiar with supply chain management theory and applying it to their own operations. However, planning for the inevitable change in ownership is not a favorite pursuit. While it’s beyond rational, it’s reality.

Business transition planning is a challenge in any industry. The important thing is to get started. For manufacturers, it may help to view this process with the common experience of the supply chain. Consistent planning plus communication plus oversight should equal improved production flow and profits. Without supply chain management, you already know the risks. In the same way, here are some real risks for manufacturers that delay business transition planning.

• Allowing someone else to decide the future of your company for you
• Working longer than you planned
• High legal and accounting costs for a rushed sales transaction
• Loss of business — and personal — net worth*

*Estimates on delay of business transition planning (between ages 45 and 60 vs. age 68 or later) can cost owners increasing multiples in diminished net worth.

Often, the main bottleneck created by owners is procrastination. They usually have an idea of their transition plan, but have not taken steps to pursue it and don’t know how realistic their expectations are on paper. Expectations for business value, a realistic successor or buyer, and continuation of operations are not guaranteed without a plan.

What if your first phase of business transition planning was handled within 210 days? This is the same time frame for applying the Theory of Constraints to your supply chain. If it’s good enough for your supply chain, imagine the value to your business and future net worth if you:

1. Assessed demand for your business
2. Identified weak links or choke points to a successful transition
3. Took the “critical path” that is most challenging to pursue your plan

By looking at these three areas of your business transition planning process, within a manageable 210-day time frame, you will make tremendous progress toward a successful and profitable transition. Our Succession Planning Starter Kit can provide more information on potential barriers and action steps for manufacturers over those 210 days.

Continue Reading: Assessing the Demand for your Business

Gary Jackson, CPA, is a tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience at Cornwell Jackson and in providing tax planning to individuals and business leaders across North Texas.

Contact him at gary.jackson@cornwelljackson.com.