Is This Any Way to run a Business? The Transition of your new Business

Is This Any Way To Run A Business? The Transition Of Your New Business 

"How To Buy A Business"

The Transition Plan (Chapter 43)

Recall the story about a dog chasing a truck. “What would he do with it if he ever caught it?” he wondered. I've heard of acquisitions that had the same issue. The acquisition is completed after all of the negotiations, due diligence investigations, meetings, document reviews, and various discussions, and the parties celebrate with a victory dinner. The following morning, both the buyer and the seller look in the mirror and ask themselves, “What do I do now?”

The best acquisitions, those with the best chance of success, are those in which the answer to that question is known well in advance. It is simple; simply create a comprehensive, written Transition Plan. Once the Letter of Intent has been finalized, the attorneys have begun work on the closing documents, and the due diligence process has begun, I frequently turn my attention to drafting that Plan.

It should cover the first thirty days, the first ninety days, and the first six months following the closing. It should also include sections for each major activity in both businesses, such as administration, accounting, sales and marketing, and manufacturing. I prefer that the Transition Plan be in outline form, with individual tasks, the people in both companies who will be in charge of completing those tasks, and an initial schedule for the start and end dates for each.

It is critical to include key people from both companies, the buyer and the seller, in the Transition Plan's development. As a result, the Plan becomes their Plan, and they have a vested interest in its success. That early-stage collaboration between the companies also sets a good precedent for future collaboration to achieve common goals.

The identification of redundant jobs is one of the more delicate aspects of this Transition Plan. The consolidation of certain departments and the elimination of duplicate positions are among the primary economies of scale in most acquisitions. Although you might think that terminating people in these positions should wait until after the closing, I've found that identifying these positions ahead of time benefits both the company and the individual. Furthermore, the people in these positions are almost certainly aware that they are venerable.

It is far preferable to be open about the acquisition's economies and to consult with those who will be made redundant. This allows them to work on finding alternative employment while remaining at their current job. Because these people may be required until a certain point in the transition, I've frequently used a severance benefit to entice them to stay until that point. They would receive a higher payment under this severance plan if they stayed until their portion of the transition was completed. That is preferable to them simply assuming their position will be eliminated and leaving prematurely. By the way, being open about these economies may prevent a valuable employee from leaving because they believe their position will be eliminated when it will not. 

When department consolidations are part of an acquisition, I like to include organization charts for both companies. These depict the organization of each operation prior to the acquisition, as well as the changes anticipated during the thirty-day, ninety-day, and six-month time periods covered by the Transition Plan. Even when consolidations aren't required, I like to create organizational charts for the target company. Because few companies publish formal organizational charts, these not only define the organization being acquired, but also show changes that may be implemented by the new parent or by future growth.

Again, it is far preferable to have the key managers of both the buyer and the seller discuss these positions, responsibilities, and reporting lines prior to the closing, agreeing on how and when they will change, and why they should change. Promoting early collaboration among companies in making such decisions contributes to the overall success of the acquisition.

I also like to include detailed financial projections for the target company in the Transition Plan. These can be based on the projections made earlier for determining the purchase price. By now reviewing those projections with key people in the target company and making changes based on their observations and ideas, the projections not only confirm the expected financial results for the acquisition, but also make its financial results a joint responsibility.

Accounting and internal financial controls should be given special consideration in the Transition Plan. In most cases, the accounting software used by the acquired and acquiring companies will be different. Transitioning to a single system and consolidating financial reporting typically entails planning historical data transfers from one system to the other as well as establishing data communication lines between the two companies for future data transfer.

Furthermore, most small businesses have insufficient internal financial controls. (For more information, see Chapter 25.) It is critical to plan which of those controls should be applied to the acquired company, as well as how the information will be compiled and reported. If there are unanticipated problems after the closing, which there will be, identifying those problems quickly may be critical to the acquisition's success.

Sales and marketing are also critical components of the Transition Plan. I worked on the acquisition of several industrial scale companies a few years ago. These scales are typically sold through an authorized dealer network. One of the benefits of the acquisition was the introduction of one manufacturer's scales to dealers for the other. The manner in which this introduction was to be handled, as well as the preservation of the brand identities and the consolidation of the two dealer networks, were critical to the acquisitions' success. The Transition Plans assisted both companies in understanding how the consolidation would be handled, which sales personnel would speak with which dealers, and which redundant dealers in specific territories would be eliminated.

Brand identities, as well as corporate names, are also important factors to consider. I've worked on acquisitions for a construction subcontractor where it was important to keep the acquired companies' local presence and original name. I also arranged several acquisitions for an association management company where the importance of its regionally recognized brand name outweighed local recognition. Plan ahead of time how and who will handle these market considerations.

Buying the right company for the right reasons can turn out to be a bad acquisition if the transition period is fraught with confusion, low employee morale, and defections from either company. These issues can be minimized, and in many cases eliminated, by careful planning ahead of the closing date. The written Transition Plan should be the focal point of that preparation.

Mitch Levin, MD, CAPP, CWPP

Principal, Corporate Finance Solutions
Mergers & Acquisitions/Succession Planning/Strategic Planning/ Financings/Operations Audits/Corporate Sales/
Growth Strategies/Marketing Strategies/Enterprise Valuation

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