Should You Worry About Business Succession Planning?

Let’s assume that you’re reading this article because you are at least considering selling your business. Perhaps it’s just an inkling; or, maybe it’s at the urging of your spouse or a colleague.

It’s not something you necessarily want to think about, and even the terms we use to describe the undertaking of these activities aren’t overly appealing. You’ll often hear people refer to this activity as “Exit Planning,” but we prefer to call it “Succession Planning.” In many cases the Seller sells the business but does not exit the business. They remain long term to run it for the new owners. (See the case study about Lou and Momar Industries)

Either way, it means thinking about what’s going to happen – to you, your family, your business, and your employees – after you sell your company. It’s that time when you have to look at “What’s Now” at the same time you’re planning for “What’s Next.”

It’s not always easy, but business succession planning makes sense when you think about it. There will be a time when you’re ready to let go of the reins of your business, either to retire or to move on to a new adventure. That time may be in the next year, or seven years from now.

Two questions come to mind for many business owners in your position:

• At what point should I begin planning for my transition out of ownership?
• How do I plan for the future?

What may surprise you is that a significant part of our focus on Succession Planning involves implementing strategies and tactics starting today, especially with an eye towards increasing the value of your business.

Exit plans in general are too expensive, just common sense, and rarely implemented. That’s why we shy away from full-blown exit plans, and prefer instead to focus on a transition or succession plan that thinks as much about today as it does tomorrow.

Mapping Out Your Future

At some point in the future, you’ll transition your business to a new owner. Ownership might stay in the family, or you may sell to a competitor. Either way, you’ll eventually be stepping away from the day-to-day management of your business.

If you’re reading this article, and you’re a business owner, then you’ve already begun your succession planning, regardless of whether or not you have any specific plans to transition from running or owning your business. It means that you’re already thinking about it, so now is the perfect time to create a strategy.

The first step is to map out your future as someone who no longer owns and runs this business. Will you retire? Will you buy a different business? Will you continue to run the business for a new owner? What about your family, the employees of the company, and other shareholders?

You know the phrase, “If you don’t know where you’re headed, you’re likely to end up where you are going.” Transition planning begins with setting a clear direction for how you want things to look after you sell your business.

What kind of income will you need?

Whom do you want in charge of the business when you’re gone?

What, if anything, would you like to see happen with your business?

What will you do with your net proceeds from the sale?

Businesses are rarely sold for purely financial reasons, but money is a consideration when planning for your future. Do you have a good sense of what you’ll need, whether you’re retiring or starting anew with another business? Map out your assumptions about the sale of your business – what you’ll get, how the sale will be structured, what happens with the company assets and employees.

And, if you plan on keeping the business in the family, clearly identify how you’d like to see the company grow, and how you’d like to participate in that growth, if at all.

Some of the things you may want to consider include:

• What assets will you need to continue your legacy and philanthropic goals?
• What types of family or charitable trusts should you establish to yield the maximum benefit to your family?
• How will your money be split between your personal lifestyle, family, charity and the government?
• What assets will you need at the time of the sale to fund your goals over the next 15 to 20 years?
• What kind of liquidity will you need to fund your goals and plans?

Coming to Terms With the Need for a Business Transition Plan

It’s one thing to ask the above questions and put your goals on paper. It’s quite another to see where you are today in relation to your plan. Once you’ve established your goals and your ideal transition scenario, it’s time to analyze the gap. The gap is the difference between where you are today, which we can help with, and what you want from the sale of your business.

The gap analysis tells you how far you are from your target, and also helps to identify what you need to get from here to there. Assuming that your transition plans are for sometime in the future, this will give you time to bridge the gap. And, if little or nothing changes in the interim, you’ll have a good grasp of how things will look at the close of the sale or transfer of ownership of your business.

The good news is that you’ll simply be doing what you should be doing anyway – driving up the value and liquidity of your business…

Implement Business Value Drivers Starting Today

One of the goals of Succession Planning is to clearly articulate what you want to occur, financially and otherwise, at the time of your transition out of the business. You may work with your attorney to draft a contingency plan (we have link to form you can use) in the unlikely event of a sudden illness. And, you could create a document that outlines all your wishes.

Another goal of succession planning should be a plan to drive the value of your business up, further ensuring your legacy and future. This is especially true if you discover a gap between where you are and where you want to be.

You already have a number of value drivers in your business, including your products, management, organization, sales force, and your expertise. You’ll want to identify the value drivers you have in place, and whether those drivers are performing as well as they could. The goal is to understand how you’re already positioned to increase the value of your business, and other ways to build value. (We’ll help you find the value drivers and detractor)

Building value may also be as simple as implementing 12 Trailing Months Accounting (TTM), creating a reliable and current inventory, or having reviewed or audited financials.

You’ll want a ballpark evaluation (not the $10,000 variety), and to talk with your CPA about the tax effect of the valuation and eventual sale. Then, you’ll get a simple legal review. (Be sure to read our article on Business Valuation).

When we know where you are, where you’re going, and have identified the value drivers of your business, we can apply your competitive strengths to create present-day options for building value that won’t exist without such a plan.

The Best Teams Have the Best Coaches

Succession Planning is optimally done as a team activity, and not in isolation. There are a myriad of considerations when transitioning from ownership or management of a long-held business.

That’s why we created our Business Succession Coaching system. It’s a formalized roadmap for selling your business that focuses on preparing your business for sale over the next two to ten years.

We create and update annually a straightforward, less than five page report that gives you:

• A Gap Analysis
• Financial Review and Recast
• A valuation opinion
• Value drivers and detractors
• Action steps to increase value and liquidity

Learn more about Business Succession Coaching