September 21, 2021
Succession planning probably isn’t high on the priority list of many business owners. After all, owners have lots of things to think about other than the day when somebody else will be running their company. But this doesn’t make succession planning any less important.
It’s critical to think about the long-term future of your business — including after you have handed the leadership reins over to someone else. The beginning of a new year is an especially good time to focus on succession planning strategies. Here are a few questions to ask as you devise a succession plan for your business.
1. What are your post-business ownership plans?
How much thought have you given to what you’re going to do after you sell your business? Maybe you plan to retire and take it easy for a while. If so, you should work closely with a professional wealth advisor to develop a detailed retirement financial plan to help ensure that you have sufficient resources to support your desired retirement lifestyle.
Or maybe you want to start another company after you sell your existing business. In this case, you’ll want to make sure that the proceeds from the sale of your business are sufficient to launch your new venture.
2. To whom will you sell the business?
Business buyers usually fall into one of two broad categories: internal buyers or external buyers. An internal buyer may be your existing employees or management team, in which case the business sale could be conducted via an employee stock ownership plan (ESOP) or management buyout (MBO). Or it could be family members if yours is a family-run business.
There are two main types of external buyers: financial buyers and strategic buyers. Financial buyers, such as private equity groups, look for companies with high growth potential that they can later sell at a profit to reap a return on their investment. Strategic buyers, meanwhile, seek businesses whose products or services complement their own, such as a competitor. This kind of merger can help the buyer gain market share by acquiring your customer base and consolidating operations.
3. How can you add value to the business before putting it on the market?
The best way to boost the eventual sale price of your business is to focus on key business value drivers today. These are things you can do now to make your business more valuable in the eyes of buyers while reducing potential risks.
For example, are your corporate records, contracts and other legal documents all current and in good standing? Are your financial statements accurate and current and is your technology up to date? Have you developed a seasoned and experienced management team that’s prepared (and financially incented) to help ensure a smooth transition to new ownership? And perhaps most importantly, is there a realistic business growth plan in place that will enable buyers to realize positive returns on their investment?
4. How much is your business worth?
This is the proverbial $64,000 question. Many owners think they have a good idea of what their business is worth based on their gut instinct or what their buddies at the country club sold their companies for. But this value often isn’t realistic. Most owners have an emotional connection to their business and tend to over-value the “sweat equity” they’ve put into building it.
Buyers will look at your business from a purely numbers and analytical approach. The main thing they’re looking at is the quality of business earnings and how repeatable these earnings are in the future. Therefore, it might make sense to engage a valuation professional to conduct a quality of earnings study to estimate the future cash flow potential of the business and come up with at least a rough business valuation.
5. Who will form your business advisory team?
Selling a business is a lengthy and complex process that requires high-level expertise. You should begin forming a business advisory team that includes an investment banking firm to market your business, a valuation professional to help you gauge business value and determine the selling price, an experienced M&A attorney, and a tax advisor who specializes in the sale of closely held businesses.
Even if you’re not planning to sell your business anytime soon, it’s still smart to go ahead and start the business succession planning process now. This way, you’ll be ahead of the game when you’re ready to exit the business one day down the road.