When you started your business most likely the last thing on your mind was when you were going to pass it on to your children or sell the business to someone else. In a perfect world that should have been the time you also started thinking about your succession or exit plan. Succession plan simply being the process you would use to pass the business on to most commonly a family member. Exit plan being your selling the business to another party.
In many respects, both require the same sort of planning, many will state that each plan is highly personal and unique, yet common elements exist for both. The common elements are:
- The plan you have for yourself specifically
- The plan you have for your family after you leave the business
- The plan you have for the business.
Yes, there are many variables here that are included in these steps and I strongly encourage everyone who owns a business to consult with:
- Their Business Advisor
- Their Attorney
- Their Accountant (not that same as a Business Advisor)
- Their Banker
- Their Personal Financial Planner
Navigating the process of passing on or exiting your business without the active involvement of all four of those experts is a recipe for a bad business transaction when the time comes.
When the time comes is also an issue. This is not a last-minute decision, a 6-months before I do it decision or even a 1-year decision. The process for exit or succession planning is commonly a 5 or more year process. That doesn’t mean if you haven’t begun to plan it now and you want to move on in 6-months it is too late. It simply means that the time, energy, resources (money) will be significantly higher and the outcome will not be as profitable for the business owner if they had started 5-years ago. None of the experts above can work miracles, never the less, you will need them all even if your need is immediate.
When I work with small business owners regarding their plan our primary focus is first the actual value of the business to the owner and secondly the long term sustainable profitability of the business. For most small business owners, the business is their retirement plan, ensuring they have the appropriate financial resources from the business with which to enjoy their retirement is crucial.
As a Business Advisor, my role is the maximize the productivity, profitability, and value of your business. This is done with an eye toward:
- Providing the business owner with the greatest possible income from the business if they are retaining ownership
- Providing the owner with the greatest possible profit if they are selling the business
- Providing education and coaching to family members who are acquiring or will now be leading the business
A good Business Advisor will accomplish the following:
Maintain the viability and continuity of the business:
The viability and continuity of the business are most important. The business provides salaries and wages and eventual liquidity for the owner. A business plan is often the critical planning tool taking precedence over the exit planning and the estate planning.
Address a Retiring Owner’s Needs:
Business exit strategy and succession planning should take into account the needs of the retiring owner. The owner should be prepared psychologically as well as financially for the exit. Therefore, to ease the owner’s concerns, it should be demonstrated that there will be sufficient income to fund retirement and that upon an exit the owner will be able to enjoy their life after exiting the business.
Planning For Other Stakeholders:
Exit planning and succession planning needs to also address the needs and fears of partners, employees, creditors, customers and vendors. Employees and customers can become especially vulnerable when the business leader exits the business or the business is sold. If family succession is planned, the ability for family members to effectively lead and manage the business must be ensured.
Choosing a Successor:
Find a way to place control of the business in the hands of a person or persons who have the inclination and ability to successfully operate it.
The business exit plan and succession should prescribe criteria for entrance into the business. For example, a prospective manager could be required to have a certain level of education or business experience, along with requisite financial resources to purchase the business.
Selling to a Third Party:
If the decision is made to sell to a third party, consideration should be given to preparing the business for sale at the highest possible price.
Whether you plan to sell your business or transition it to a family member, you must take the time to plan. The longer you have to prepare the greater your ultimate reward. There is no better time than now to start. Waiting will only cost you the financial security you want.
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