February 18, 2020
In this blog series, we aim to help you unlock unrealized value in your business and go beyond what your business is today. There are always new methods to build value in your business and given the adequate time you can execute a plan to realize it. This 6th blog installment discusses Succession Planning. Creating an exit plan is not usually an important item on your to-do list, but when it comes time to leave, having a solid strategy in place helps ensure a successful financial future.
Factor #6 Succession Planning
Every business owner will eventually sell or transition out from their business. Exiting might happen for several reasons; diminishing profits, growing competition, passing it on to family members, retirement, changes in health/life goals or cashing in on your goodwill and success. Some owners leave their business willingly, while others may have no choice. Ultimately, it’s never too early to plan. Here are some things to consider:
1. Preparing to exit a business can be an extensive process involving several financial, operational, and legal obligations. The plan is to have your business in the best possible shape before you exit. Consider having a business evaluation. It can identify potential problems, areas for improvement and even unlock unrealized value. There are always new methods to build value in your business and given adequate time you can execute a plan to realize it. If a purchaser can see you have been contemplating and organizing a strategy for some time and that it’s not a desperate “I can’t do this anymore” sale, your value will be higher.
2. One component of selling a business that some owners forget is who will run it after they have left. While some purchasers might choose to establish new leadership, many wish to acquire companies which already have a strong management team in place. Begin to develop clear and teachable processes for the day-to-day running of your business and empower your employees to run the business in your absence. Competent, well-trained, and considerate staff will facilitate a smoother handover to the new owner. In contrast, companies with poorly trained and undelegated staff can devalue your company.
3. The creation and documentation of standard operating policies and procedures will demonstrate how your business can be maintained successfully after the sale and that YOU are not necessary for this to happen. This information can include computerized and manual procedures used in the business to generate revenue. But beyond this, automated systems show the acquirer that you are less reliant on the human element than another potential target.
4. Selling or leaving your company to one or multiple family members without proper planning can lead to serious legal disputes, which can create animosity and tear families apart. If you sell to an acquaintance and disputes later arise, you risk damaging the relationship. Alternatively, if you sell to staff who are also your friends, it is easy to focus so much on the friendship between you that you don’t negotiate as high a sale price as you otherwise would have done. The three key ways in which a business can be transferred to a successor are; through a sale, a partial sale or as a gift. Speak to a solicitor or professional advisor about the option best suited to your situation.
5. The best exit strategy for you is the one that fits your goals and objectives. If you want your legacy to resume after you leave, selling it to a relative, an employee, or a customer might be the best choice. If you do not have a successor who is a family or staff member, you still need to think like a succession planner. The individual “succeeding” you needs to be set up for success and you need to look after your own interests.
Formulating an exit strategy is the most overlooked factor of a business plan. Being prepared can reduce your tax burden at the time of sale, increase your selling price, or even make an unsaleable business sellable.