Get an Early Start on Your Business Succession Planning

By Generational Equity

07/28/2017

“Business owners function at such a rapid pace to remain competitive, it’s no wonder that developing their exit plan and replacement doesn’t seem like today’s priority.” – Kirt Walker, President & COO of Nationwide Financial

Right now, the thought of no longer owning your business could be the furthest thing from your mind. If you still get a rush from walking into the office and managing your team every day, then you might feel the idea of exiting is an unnecessary distraction. But, no matter if you see yourself leaving your company in five years, ten years or fifty years, we feel it is essential for business owners to get an early start on their business succession plans.

Why is that? Because you can’t put a price on PREPARATION. It may not be soon, but one day you will exit your company, and most would prefer it to be on their own terms. Having a clear understanding of what will happen to your business once you leave the helm, whether it is selling to a private equity firm or a strategic buyer, gives you peace of mind for the future. Especially for family businesses, which according to the U.S. Census Bureau, account for around 90% of enterprises in the nation, there might be an added emphasis in securing the future legacy of your company.

It comes as a shock, then, that three in five small and medium sized enterprises (SMEs) do not have a business succession plan in place, according to Nationwide’s latest Small Business Survey. It is surprising that the majority of company owners do not have plans in place for when they are no longer in control. Not only does this put the longevity of your company beyond your ownership at risk (remember that around 70% of family businesses do not survive the transition from first to second generation), but it also makes your company less viable for prospective buyers.

“Why would having no succession plan impact the value of my business?” Potential buyers will likely be unsure as to your company’s growth prospects without you in charge. Entrepreneurs are often specialists in their industry, understanding every aspect of their business, clients and the market they operate in. So, if there is no clear demonstration that your organization will continue to grow without your ownership, it is doubtful that you will receive an offer that reflects your expectations of your company’s value.

Starting Your Business Succession Plans Early

So, now you’ve realized how important it is to have a business succession plan in place. But why handle it now? At Generational Equity, we feel it is essential to start early to best navigate the obstacles associated with an exit. Particularly with family businesses, there can be disagreements and hurt feelings over the choices you make about the future ownership of your company, and these are only exasperated if you give yourself a tight deadline to make these decisions. Therefore, starting these discussions early will help you traverse this process as smoothly as possible.

“It is important not to make assumptions about who will take over your business after you leave”

Where do you begin? First, it is important to establish goals and objectives, not just for yourself but for your management team/family members. What are your visions for the business? How committed is everyone to its long-term success? Once you have a collective concept on the future of your company, aided by the support of trusted financial advisors, you will have a clearer idea about how your business succession will work in practice.

Once your goals are established, the next stage in your business succession planning should be settling on a decision-making process. Again, a collective decision is the objective here: while you may own the company, discussing this process openly with your team or family will help everyone understand the conclusion you reach, limiting any ill-feelings associated with succession negotiations. It is important not to make assumptions about who will take over your business after you leave: we have encountered many entrepreneurs who were convinced their children would want to continue the family business. However, this isn’t always the case, which will leave either your children pressured into accepting a role they aren’t passionate about or you without a fitting heir apparent.  Also, financially, very few children have the capital to adequately pay you off at exit.   This often forces you to accept a long term note that the children may have problems ultimately paying. 

When your decision-making process is in place, you can approach the burning question: who takes over when you exit? Take your time with this decision as it is crucial to the longevity of your single largest asset. Discuss this with your financial advisors, as they will help provide an impartial assessment of your team’s strengths and weaknesses. Remember, equal and fair do not mean the same thing: it is fundamental to make this decision with the future of your business in mind, which will likely mean several tough choices. It is ideal to settle these early so you can progress to the training of your eventual successor.

“Determining the successor for your business early offers you the advantage of molding and training them to meet your company growth goals.”

Also, you should make sure to distinguish between owners and managers – although you might place yourself in both categories, you may wish to split ownership across numerous people while assigning overall management to one individual. With so many different roles to be decided for a successful business succession, it is imperative you receive expert advice in this area.

Determining the successor(s) for your business early offers you the advantage of molding and training them to meet your company growth goals. This step is essential in building a buyer-ready business; buyers want to minimize the risks associated with any acquisition. If they feel your presence is crucial to maximizing the return on their investment, they will likely lobby to keep you tied to your company post-sale. Training and working alongside your intended successor will ease doubts a buyer might have about your company’s ability to grow following a transition in ownership.

A final advantage to starting the essential step of business succession plans as early as possible is the opportunity to develop this over time. Things change, and it is recommended to always have an up-to-date version of this valuable documentation. A timely start gives you the time necessary to alter these plans when appropriate, and leaves your business in the best position possible if one of the dreaded 5 Ds become a factor (Death, Divorce, Disablement, Disagreement, Disinterest).

Start Your Succession Planning with Generational Equity

The bottom line is this: business succession planning can be a challenging process, and is something that demands professional guidance. Our experienced M&A advisors at Generational Equity have helped hundreds of business owners establish a business succession plan that ensures the legacy of their company, as well as making it a more appealing proposition on the market. Taking this important step as soon as possible will place you in the best position to prepare for an exit on your terms, whether you hand the reins to an employee, partner, family member or external buyer.

To discover more about business succession planning and how it impacts the value of a company, you should attend one of our complimentary executive conferences. This conference offers a comprehensive insight into the M&A process, giving business owners strategies for value enhancement and exiting their company for the optimal price. Don’t hesitate to find out when we will next be in your area.

You can also reach our professionals at Generational Equity through our dedicated contact page.