Selling your business to fund your retirement can be a scary proposition. Finding the right buyer & getting maximum value for all your hard work takes time and careful planning. Is your business going to be sale ready?
Why is Business Succession Planning Important?
By nature, business owners tend to be optimistic risk takers who derive much of their personal identity and self-worth from the business they have created. So it’s not surprising that the mere thought of transferring ownership to someone else can be highly emotional and complicated – which is why business succession planning is frequently not a priority until such time as retirement looms, or incapacity (or death) strikes.
Yet failing to create a business succession plan has far-reaching consequences. When forced, ill-informed or panicked decision making occurs, this could mean:
- Your business is severely disrupted as arguments take place over who should own or run the business.
- Sales and morale within the business may plummet as a result of the uncertainty and lack of leadership.
- Assets are sold at fire sale prices.
- Your business is transferred into reluctant or incapable hands.
- Your business becomes unsaleable.
- Your business is wound up when you hadn’t planned to do so.
- Your standard of living in retirement is not what you had hoped for.
What Does Succession Planning Entail?
Succession planning is all about preparing to one day leave your business and the best time to start creating it is now. Early planning gives you time to maximise the value of your business and your plan will quickly become a blessing should an unexpected event such as illness or death occur. So what are the things you need to consider?
Create a written plan
A succession plan is no use if it exists only in your mind. It needs to be formalised so you know exactly what course of action you intend to take, when and how. Setting it out in writing often means shortcomings are exposed, leading to more effective strategies being employed.
Form an exit strategy
Your exit strategy is all about how you will leave your business. To be realistic, it needs to take into account various scenarios. What is your retirement scenario? Your sudden incapacity scenario? Your death scenario? While your business succession plan is all about expecting the best, you need to consider and prepare for the worst too.
A clean break or a transition period?
You may not wish to step away from your business completely; part-time hours and ‘semi-retirement’ could be appealing. In which case, how do you intend to facilitate that transition, particularly if you intend to sell your business?
Who will you transfer your business to?
Who you intend to transfer your business to will have a significant impact on the decisions you make long before that transfer actually takes place. Do you intend to transfer ownership to a family member, another shareholder or staff member, or a buyer on the open market? Each option has advantages and disadvantages that need to be carefully considered.
In the same way your exit strategy needs to consider alternative scenarios, you also need to have a “Plan B’ for who you transfer your business to. While it might be your greatest desire to transfer your business to your child (and right now they are saying they are keen), life events could change that. Unless you intend to wind up your business, make sure you get and keep, your business in a saleable state.
Get Your Business Ready
Getting your business ready for sale is not a quick process. At a minimum it will take two to three years, probably longer. And while you are emotionally attached to your business (which can cloud your judgement), you need to think about your business dispassionately and have in place all those things that a potential buyer will be looking for:
You would think it goes without saying that having well documented accounts is a minimum requirement. However, a surprising number of small businesses do not have adequate accounting records available come sale time. Since buyers are looking for at least two to three years’ worth of thorough accounting information, you need to make sure this is all in hand – you can’t conjure up what you don’t have at the last minute.
Are your accounts thorough and up-to-date?
Documented systems, procedures & processes
Buyers expect to purchase a business with all the necessary systems, procedures and processes in place. But this operational infrastructure consists of more than just owner “know how” – it must also be well documented and easily accessible. Unfortunately, many small businesses fail to do this. As noted before, information which exists only in your head is no use; it must be written down!
Attention must also be paid to the quality of these systems, procedures and processes. Are they for your benefit or do they work to make it easier for your customers to do business with you? A business whose operations are not set up to develop trusting and satisfying relationships with its customers is less attractive to potential buyers – no matter what the historical accounting information provides.
Are your systems, procedures and processes up-to-scratch?
Branding which connects
Your logo is not your brand – your brand is so much more than that. It’s how your audience sees, talks about and experiences your business. Every time you send an e-mail, hand over a business card, conduct a sale, send a letter, appear in an advert, give a brochure, deliver a webinar, write a proposal or give someone your web address, you are shaping your brand.
And what does your brand say about you? That you’re consistent and reliable? You keep your promises? You understand and connect with your intended audience? For your brand to add real value to your business, it must do all of these things and more.
Is there any real value to your business brand currently?
This is where the key to business success is found. Who are your customers? What do they want? How valuable are your “best” customers to your business? How strong is your relationship with them? Will they readily transfer their patronage to a new owner or are they strongly connected to you personally? In the “customer age”, a business which truly serves its customers will enjoy strategic and competitive advantage.
Are your customers really a business asset?
Seek Professional Guidance
Creating a realistic business succession plan will require the input of experts to get it right. An authorised financial adviser can assist you with creating the initial plan, making sure it dovetails in with your personal lifestyle and retirement goals. Depending on the content of that plan you may then need further advice and assistance from legal, accounting and taxation experts as well as a customer-centric business strategist to ensure you maximise your business’ value.
Perhaps one of the most difficult challenges you will face is learning to slowly let go in advance of actually relinquishing control over your businesses. However difficult, it is a necessary part of the process. But once you come out the other side, you will be more than glad you made the effort to create and implement your business succession plan.
©How To Group Ltd trading as Loyalist.
Carol is a business strategist and director at Loyalist, Customer-centric Business Specialists, in Auckland. Carol helps established professional and service businesses transition to full customer-centric organisations so as to increase their long-term financial value and attractiveness to buyers in the future. A former lawyer and business educator, Carol has over 20 years relevant experience working with SME businesses in New Zealand.