Why Business Owners Should Have a Transition Plan

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services including business valuation, fraud investigation, and fraud deterrence programs in Philadelphia and the Delaware Valley.

The statistics are astounding.

Over the next 10 years, more than 4.5 million privately owned businesses will transition . . . but only about 20 to 30 percent of them will sell.  This means more than 3 million business owners will have to find another way to transition their business. Unfortunately, many of those 3 million-plus business owners could realize much less from their businesses if they don’t have a transition plan in place.

Simply put, a business transition plan is a well-thought-out and defined roadmap for transitioning ownership of the business.  But, it’s not a simple as it sounds. A business transition plan includes the following key elements/questions which must be addressed:

What financial results does the business owner want to realize from the transition of the business? – For example, does the business owner expect to realize a specific annual income from the business during the transition period and after the transition is completed?  How about perquisites and other benefits?  How about a lump sum payment versus periodic payments if the business is sold?  These are critical decisions that must be made to help the business owner determine how the business is to be transitioned.

How the business is to be transitioned? – There could be a significant difference if the business is to be sold to a third party, gifted to one or more family members, sold to one or more key non-family managers, sold to an ESOP (Employee Stock Option Plan), liquidated. Each of these options carries different implications for how the business is to be transitioned as well as how the business owner’s expectations regarding income, benefits, and payment are to be realized.  Additionally, the form of transition can have significant implications for taxes. For example, does the business owner sell the stock of the business (realizing capital gains which are taxed at a lower rate) or does the business owner sell the assets of the business (tangible asset sales are taxed at higher ordinary income tax rates)?

How much is the business worth today? – This key question has several implications.  For example, it might be worth considerably less than the business owner believes it to be worth.  This can significantly affect the expected financial results from the transition; the length of time until the business owner transitions the business; and the way the business is transitioned.  If the business is worth less than expected, the business owner may have to devote more time and effort to grow the business to the desired value or accept a lower financial realization.  If the business is worth more than expected, this could shorten the time frame that the business owner expected to make the transition.  It can also affect the form of transition.  For example, if a business owner is expected to make annual tax-free gifts of ownership to family members, a higher valuation will require either a longer period for the gifts or the business owner would have to either pay gift taxes or use up the unified credit faster than expected.

How will key employees, customers, and vendors be affected by the transition? – In many cases, the business owner has relationships with certain key employees, customers, and vendors.  The business owner needs to investigate how the transition to new ownership will affect these relationships.  For example, suppose one or more key managers expected to purchase the business upon the business owner’s retirement, but because of the previously discussed factors the owner intends to sell the business to a third party?  Or suppose the business owner is planning to transition the business to a family member who doesn’t get along with one or more key managers?  Suppose the relationship between the owner and a major customer could be adversely affected by the retirement of the business owner?  All these factors need to be considered in the transition plan.

Addressing the above issues and questions may be more complex than most business owners can handle.  In such cases, the business owners need to seek out qualified, experienced professionals who can help them develop their business transition plan.

Additionally, business owners need to understand that once developed, the business transition plan cannot be set in concrete.  It must be constantly revisited due to changes in technology; changes within the business’s industry; changes in the personal circumstances of the business owner (for example: A divorce, change in family relationships, or a significant illness); change in other business circumstances (for example: Death or departure of a key manager, loss of a key customer or vendor, etc.); change in the regulatory or tax environment (for example: The impact of the Tax Cut and Jobs Act); and/or changes in the economy.

Those business owners who create and maintain an effective business transition plan will be the ones who can successfully realize their financial expectations from the transition of their business.

If you need a business valuation professional in Philadelphia, or if you require any other services of a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Valuation Analyst and a Certified Fraud Examiner in Philadelphia.