Knowledge and Insights
All business owners should consider their succession plan; not just those nearing retirement. The earlier you start planning, the better. Many business owners wait until it’s too late, and leave money on the table–or worse–struggle to transition or sell their business.
It is never too early to start planning. After decades doing this, I can say with confidence that the business owners who plan for succession end up with better outcomes and peace of mind.
Types of Business Succession Plans
There are two main types of business succession: internal and external.
- Internal successions occur when a business owner executes a business transfer to an existing stakeholder: key employees, other existing shareholders, or even a family member.
- External successions involve sales to strategic or financial partners. Strategic partners include competitors, customers, or suppliers, while financial partners are normally private equity groups.
Further both internal and external successions can be consummated fully at a point in time or through a series of transactions where the owner continues to retain some aspect of the business until the ultimate transfer is completed. The options of internal vs. external and completed either over time or at a point in time with options to continue some form of ownership or involvement presents the business owner with a myriad of options to consider.
The Risks of Not Planning Ahead
Regardless of the type of succession you have planned, it’s imperative to think ahead. The sooner you start, the longer your runway to accomplish your objectives and maximize your business’ value.
Waiting too late to plan leads to many risks, including:
- No Sale – the worst-case scenario is arriving at retirement and discovering nobody wants your business or if they do, the purchase price will be significantly impaired. There could be several reasons for this; examples include stagnant growth or inadequate leadership development.
- Leaving Money on the Table – by planning early, you have time to strategically invest in assets including key personnel that increase the value of your business. Wait too late, and you won’t have time to harvest these investments.
- Leadership Stagnation – fail to develop leadership talent and offer ownership opportunities, and your best people may leave. This undermines business performance and limits your succession options.
Positioning Your Business for a Successful Transition
There are five stages to preparing your business for a successful transition:
- Defining Your Objectives – some business owners might want to sell their business for the highest price, whereas others might want to provide ownership opportunities for long-term employees and continue to build upon a legacy. Some business owners wish to retire early and ride off in the sunset whereas others look forward to being productive in their golden years. It’s important to decide your path early on.
- Determining Your Needs – just as important as clearly defining your succession objectives is a thorough understanding of your financial and other needs when you step away from the business. A sound financial plan is critical. This will drive what you need to get for your business when you transition.
- Understand What It’s Worth – determine a realistic valuation of your business using methods like comparing sales of similar businesses.
- Seeking & Evaluating Offers – for external sales, you’ll need an advisor or team of advisors to prepare you and the business for a transaction, and to seek and evaluate offers. For internal successions, you’ll need a comprehensive plan that addresses all the key elements to ensure business continuity.
- Execution – with adequate planning, you’ll be ready when it’s time to meet potential buyers, negotiate a deal, and draft relevant contracts and documents. For internal succession, the plan will form the roadmap for actionable steps.
Clearly, this is a long process. Your business represents your life’s work, and it is probably the largest asset on your personal balance sheet, so doing due diligence is critical.
By planning early, you’ll receive the best possible outcome. You’ll have time to strategically invest in business drivers, and you’ll be content knowing you’ve done what’s best for your family and your business.
Work with Mercadien – Business Succession Experts
Mercadien’s Private Company Services Group has worked on countless business successions, from planning to implementation. For most business owners, a succession is a once-in-a-lifetime event, and it’s often emotional and complex. You need an experienced advisor to guide you through a strategic approach that’s right for you and your business. Contact me at firstname.lastname@example.org or 609-689-2396 to get started today.
DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.