Planning puts "success" in business succession
When is it time to start thinking about succession planning in your privately owned business?
Now.
Surprised? You may think your transition out of owning and managing your business is years away, but steps you take now can make that succession go more smoothly, whether it is next year or a decade from now.
Right now, many small business owners are taking a hard look at their exit strategies. The same factors that are driving corporate mergers, acquisitions and buyouts to heights of activity not seen since the 1990s, according to a recent report from Deloitte and Touche, are also affecting smaller businesses. The first baby boomers are nearing retirement, while access to capital has created a ready market of potential buyers.
Given this business environment, it is an opportune time to think through your future plans and make sure you have a succession strategy in place. Here are five key questions that will help you begin the planning process:
Am I emotionally prepared to let go of the business? For many owners, this is the question that is that hardest to answer – or even contemplate. Emotional issues can be the largest barrier to building a succession strategy. It is difficult to envision handing off control of an enterprise in which you have invested not just your finances but your physical and intellectual energy. Your entire identity and society role may be linked to your enterprise. As much as your business is you, you are your business.
It is important to face and address this concern. Perhaps a solution is a handoff in which you remain involved during a transition period, or even on a long-term basis. Just make sure that the roles are clearly spelled out so that your ongoing involvement does not become a source of conflict with the new owner, whether it is your son or a total stranger. Or perhaps the solution is to begin now to develop other interests – recreational activities, community involvement, teaching or mentoring – so that when the time comes to harvest your business you can take your well-earned rewards and find new sources of fulfillment.
Is my business marketable? Your privately owned business may bring in a substantial income for you and yet have no value that can be transferred to a new owner. If your business is primarily consulting or creative, your personal talent may be its biggest asset. Or perhaps your business success is built on a network of contacts that you have established over years in an industry.
A first step is determining if there is potential value to anyone else. If there is not currently a value, can you create value by developing proprietary or patented concepts or designs that can be transferred or licensed? Can you bring in and train a protégé who can eventually take over? Are there other ways to extend the value of the enterprise so that it is marketable to someone else?
What are the possible exit strategies? For many business owners, succession planning means handing down the business within the family. However, that assumption deserves to be challenged. First, think about your children: do they have the skills – and, more importantly, the passion – to move your business forward? Think about the business: is there a management team in place that will be alienated by a second generation ownership? And think about yourself: will you be comfortable handing off the reins to your children and being dependent on them to provide the capital for your retirement?
Other exit strategies include selling the business to the management team, a popular strategy among privately held businesses; selling to a competitor or financial buyer; or recapitalizing by selling or leveraging part of the business to turn some of the assets into cash while remaining actively involved.
When is the right time to exit? Assuming you have been in business for three years or more – long enough to establish a track record and a value for the business – when you exit is very much a personal decision. One indication that it is time for you to harvest the value is when you find that you are spending less time with the business, and have begun to pass up opportunities that you would have taken advantage of a few years ago. You may also notice that lack of risk-taking creating tension within your management team as more aggressive leaders see the potential that is being lost.
It can also be time to sell when you are inspired to take off in a new direction – to invest your energies in a new venture or passion. Perhaps you have a new business concept you want to start up, or perhaps you want to use your wealth to launch a philanthropic project. An exit may be not so much an ending as a new beginning.
External factors may also play a role. The best time to sell is when business momentum is moving up, not when it has begun to flatten. The overall health of the economy and your industry are also factors that will affect the value of your enterprise and your ability to find outside buyers.
Is my financial reporting adequate? If you believe your business is marketable, at some point you will have to put a value on it and demonstrate its financial soundness to a potential buyer or financial institution. Are you able to document several years of profitable operation? Do your records show cash flow, assets, receivables, taxes, depreciation? If you have not used a CPA to help you manage and document your finances, the time to do so is at least three years ahead of any planned transfer of ownership.
As these five questions show, effective succession planning is much more than just drawing up papers to transfer ownership. It is a financial, emotional and social process. For your business’s future success and your own well-being, now is the time to begin planning.
