Every business owner eventually reaches the point where it is time for them to exit their business. Ideally, this exit is a voluntary one that is planned out and in line with the goals of the owner.
However, exits can also be forced, either due to health, age, or trouble with the business.
The importance of succession planning for business owners, even if they are still years away from their planned exit, is to ensure that what has been built can last beyond the business owner.
Family, and other small business succession planning, often raises many questions for owners. The first, often, is what is a succession plan, but most questions revolve around how to write that plan and then carry it out successfully.
Today’s article focuses on key components and considerations essential to that process.
When building a succession plan, there are three principles to follow that can lead to success. They include the timing for planning, opportunities, and how long your transition process may take.
1. Business Succession Planning Is Best Done Early
Even if you are years away from an exit, what makes a succession plan successful, for many reasons, is planning early. There are many contingencies, opportunities, and timing considerations that you need to consider, and sooner is better.
Covering the Contingencies
Planning early creates a contingency plan for the business if an exit is unplanned, with the most common example being a health event for the owner. This is exceptionally important for family businesses and small businesses.
By having a well-thought-out contingency plan, your family and employees are not left having to scramble, but instead, have a plan and team around them to walk them through a difficult transition.
Harnessing the Opportunities
Having an idea of your exit strategy positions your business to be opportunistic.
Business owners get calls/emails/texts every week with an offer to “buy their business.” With a rough plan outlined, it is much easier to filter through these solicitations.
That outline of succession also provides a framework for strategic planning for your business. If you know your exit strategy is years away, your growth strategy becomes clearer, both for your internal team and your overall business.
Timing the Transition
Business transitions take time.
Internal succession, in particular, can take many years to execute fully, making it a requirement to plan ahead of time for a longer financial transition.
Even if the exit strategy is to sell to an outside party, it takes years to position your business appropriately for a sale, find a buyer, negotiate terms, and align finances. Many times, these deals also come with an employment agreement for the seller beyond the sale or an earn-out, which extends the amount of time for the transition.
2. Consider All Options
Between family succession, internal succession, a strategic acquisition, and a private equity acquisition, there are many paths to exit available. Assessing the pros and cons of each option is an important step in the planning process.
For example, selling to private equity may provide the biggest one-time financial incentive, but also typically comes with culture change and a loss of control.
Internal succession is typically much better for upholding company culture and leads to a smoother internal transition but takes significant time and requires outstanding leadership and organizational development.
Knowing your options and filtering through each one allows you to objectively assess each one before there is a deal on the table.
3. Know Your “Number”
Your personal financial plan is a key element of the succession planning process.
What do you need from the sale of your business (‘your number’), for your long-term financial plan to be viable? Putting together a well-thought-out financial plan helps to inform the planning process.
Perhaps you have done a good job diversifying your personal balance sheet independent of your business and don’t need to maximize business value in a sale. This puts gifting and internal or family succession on the table as viable exit strategies. Or your plan may require you to sell to a strategic buyer or PE firm to make your plan work.
Knowing your personal plan will create important clarity to filter your options.
Coordinate Your Resources for the Best Results
Whether you are operating a small family business in Lancaster County, PA, or run a large enterprise that spans the country, eventually it will be time to consider an exit strategy.
Wherever you are in the succession planning process, having a strong team of professionals around you is vital. Along with your consultant, accountant, and attorney, Master’s would love the opportunity to come alongside you as you plan for your exit. Contact us with any questions you may have, we’re happy to help.
RELATED READS:
- Are You Ready? (VIDEO)
- A Path to Internal Succession (VIDEO)
