Posted on Aug 3, 2017

Business Transition

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.

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