Why a business succession plan is importantEveryone leaves their business one day. And the earlier you start thinking about your exit, and planning for this, the more successful this move will be.
There are more than 500,000 businesses in New Zealand and a large number of these are owned by the baby boomer generation - reportedly over 30% have owners over 55 years of age. Most of these have no business exit or succession plan, yet most hope to benefit from the sale of their business to help fund their retirements. This generation is now approaching the age where they are looking at a change in direction, perhaps to step into a less demanding role or to retire from owning and operating their business. As this generation steps away from their businesses, a younger and smaller supply of Generation X will be seeking to step forward.
Unfortunately an oversupply of poor or average businesses coupled with a smaller, less resourced and more choosy group of buyers is likely to result in a number of businesses failing to sell. Having a plan and being prepared well in advance is your best guarantee for a sale and a more secure financial future.
Perhaps you are considering cashing up and selling your business tomorrow or in even five or ten years’ time. In addition to your business plan (your business roadmap), you will benefit from having a business exit or succession plan – a plan to help you sell and achieve your best exit result.
Why business succession planning?
At some stage you’ll exit your business, and having a business exit strategy (a succession plan) is a key element in maximising the saleability and for transitioning out of your business. If you are unsure about how to prepare a business exit plan, don’t ignore it, seek professional help. Having a succession plan in place is an investment in your business as it effectively maximises your businesses’ value and puts a process in place. It is also something that you should do early, have reviewed by a professional, and revisit to keep it current.
As well as ensuring the best result, succession plans can help you determine your best management succession options, retain key employees and manage tax. It also helps maintain the value of the business and its stock and assets during a management or ownership transition. Additionally the plan provides some comfort to the owner having the knowledge the exit has been planned.
There are also short-term benefits from documenting and streamlining your business: The generation of more sales and cashflow and the creation of less reliance on you, allowing you to be business sale ready at any time for whatever reason. Keep in mind that the major goals in most businesses are to increase the profits, reduce its dependence on you, make it sustainable and build its value so you have a highly saleable and valuable asset.
As a business owner you have put a lot of money, time, blood, sweat and tears into building your business. This is something you want to see survive and thrive. You also want your business to be set up so it’s easy for your successor to take it over. The best way to make sure that happens is to develop a business exit or succession plan.
The 4 most common ways of transferring business ownership:
- Business partner: Selling your shares or interests to your business partner.
- Family member: Passing or selling the ownership to a family member.
- Employee purchase: A management buyout or selling to a staff member.
- Sell to a third party: Selling your business outside your organization.
Implementing a successful business succession plan
A business succession plan should be a standalone document that dovetails into your business plan. It is important to document your preferred options and provide details on how these will work. If it is an outright sale, then any particular purchase terms need to be included to assist others with this. If a family member is involved then details around the context and wider disbursement of assets may be appropriate. It’s good to use a professional here to help construct a balanced document of wishes to avoid issues later on. A well prepared succession plan will benefit everyone should it be a quick sale or planned exit.
Your business succession plan should include:
- Detail your preferred exit strategy: Details on your expectations and why you’ve made this decision. (Ensure any affected parties are aware)
- If appointing a successor: List your potential successors and reasons why selected (are they aware and willing?).
- Defined roles and job descriptions: Detailing areas of responsibility and reporting.
- Have your business processes documented: This will allow the buyer or successor to more easily operate the business once you exited.
- Detail your business assets: Plant, property, trademarks, and/or patents belonging to the business.
- Employ more than just yourself: If possible make yourself redundant so the goodwill is with the business and lead employees can direct the business.
- Secure repeat clients and contracts: A means of keeping your clients after you exit.
- A target timeline: Details regarding when a succession would take place and specific dates as applicable.
- A business valuation: A business valuation should done and included. This should be updated as necessary.
- Any potential funding: If a family buyer, how this works and the funding options.
It’s worth considering what would happen to your business if you were no longer able to run the day-to-day operations. Who would take over? Would the business still be viable? And would it be business sale ready if the need be?
The 4 main business exit options
Keeping the business in the family.
Requires a very detailed and considered business succession plan. You need to make sure you are ready to pass on the business leadership and ownership well before you need to implement this.
Passing your business on to a family member however is not without its complications.
Who will take over? This is easier if you already have a family member involved in the business but gets more complicated when multiple family members are interested. It’s important to provide clear instructions on who will take over and how others will be compensated. It may be a case of all receiving the business, but non active members having to sell back their share? Who’s the new boss? Leadership is critical in any business so this needs to be addressed clearly considering the business needs and moving forward.
There are risks and family businesses can get messy. Second and third-generation businesses often fail due to loss of vision and age of the business. Often selling the business outright or to a key employee can be a better option.
Selling your business to your business partner.
You may have a business partner or partners, who may be potential successors. Many partnerships agreements have clauses around that, in the event of one owner’s untimely death or disability, the remaining owners will agree to purchase their business interests from their next of kin. It could be that the buy-out is within a certain period, or there is an option for the family to keep a shareholding in the business? Key person or life insurance can sometimes come into play here.
An agreed mechanism for valuing and potentially funding the business transfer should also be detailed in the partnership agreement.
Selling to an employee.
Selling your business to one of your employees could be your best option. You may have an employee who is highly experienced, business-savvy, and respected by both staff and customers and who is keen to own your business. This can be a great option, as maintains business continuity and reduces the risk in someone new coming in.
A buy-in mechanism and funding agreement needs to be considered and prepared. And the employee needs to agree to purchase your business at a predetermined date, or on a sudden change in your circumstances. Funding a buy-in can sometimes be difficult for an employee so you may need to assist by providing a loan if it’s appropriate.
Selling to a third party.
It there aren’t any obvious successors, then placing your business for sale on the market is likely to be your best option. There are plenty of potential business owners or even competitors, that could purchase your business. To ensure that your business is sold for a good price and quickly, add comma it is important to have your business “business sale ready”.
You’ll need to demonstrate that it’s a good investment (the banks will want to see this before they provide a loan to any buyer); that it has good cashflow, systems, a future and that the goodwill is readily transferred to any incoming owner.
It’s important you prepare your business for sale well in advance, and have the necessary things in place to make the transfer easy. By doing this your business will be more attractive and valuable to potential buyers.
In preparing your business succession plan keep in mind;
- Don’t hold onto the reins too long. With age we change our propensity to risk and personal goals. This can affect how a business operates and performs.
- Try and reduce the businesses dependency on you (maybe step back or just work part-time).
- Train up your successor as early as possible. This allows adequate time to transfer the goodwill and your knowledge and helps ensure the business survives.
- Ensuring the company’s long-term future. Take a long-term approach to planning and decision-making.
- Succession is a process. The key steps are: Decide, plan, initiate, and implement.
Be business sale ready
Planning is critical to making sure you are always business sale ready. As part of your business plan, ensure you are continually preparing your business for the day you sell or transfer the ownership.
Work on increasing the desirability of your business to buyers by identifying what they want, addressing any areas that leak value and are likely to be used to negotiate the price down. Ensure all systems and procedures are documented and in place. Go through your financial records and ensure they reflect a healthy turnover and profit margin. Ideally there will be an established client base with opportunity for future growth and diversification. Even though the business maybe your ‘baby’ it is imperative you reduce the dependence of the business on you personally, as this will reduce its attractiveness to prospective buyers. The business will be in more demand to buyers if it operates independently of you. A business that is dependent on you will not give potential buyers confidence in the customers remaining loyal once you have departed.
Have a succession plan in place well before it’s needed. Make sure it details when you intend to list your business for sale, retire, or transfer the ownership of the business. And if something untoward happens, then it’s all in place ready to go for a smooth transition.
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