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Five Vital Succession Planning Lessons

November 2016

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Building a successful, sustainable business from the ground up is rarely an easy road.

Those who do well overcome what are often tremendous obstacles and monumental sacrifices. Time is a non-renewable resource. Missed recitals, childhood tournaments, milestones and even general health can take a back seat—sometimes for years at time.

As a company grows, an owner may assume risks to bring the business forward fueled by nothing more than a positive outlook on the future. It’s this dedication to delivering what was promised, maintaining the business’ reputation, commitment to quality and care that allowed the business to flourish in the first place.

When it comes time to sell your business and sail off into the sunset, spend time with your family or launch a new venture, it’s important to plan well into the future—and it’s a longer plan than you think. At times life’s unpredictability may disrupt a business owner’s path despite careful planning. Given the market for M&A today, serious unsolicited offers from buyers may come. There is no substitute for strategic planning and preparation.

If a business isn’t ready for a transition or a business owner isn’t poised to take action, chances to reap tremendous rewards may be lost so creating a succession plan with built-in adaptability is critical. Even highly successful business owners often are unaware of all the steps required to get their businesses “market ready” for an efficient sale. Nearly everyone underestimates how long this is going to take.

Fully completing the succession planning process varies greatly depending on many factors including industry, size of the business, market conditions and a myriad of other factors and circumstances. However, when the right questions are top of mind and you have a clear idea about how long the planning process actually takes, the likelihood of a successful transition is increased.

Successful business owners consider the sale of their company from a buyers’ perspective. Savvy, experienced buyers have a protocol before writing large checks that typically include reviewing 3-5 years of audited financials at a minimum. This review generally includes substantive, solid explanations describing the financial picture captured year by year. If a prospective buyer cannot easily discern the P&Ls, this will be a red flag.

Another important point of consideration is the workforce itself. If there is high turnover, why is that so? If people are leaving, particularly those in key roles, are there issues that need to be addressed? Who has been with the operation long term and why? Are there any employees or partners who are critical to the business’ success, or, stakeholders who “own” or manage relationships vital to the business’ operations? Such relationships are factors an experienced buyer will need to determine.

The founder’s operational role and compensation during the succession must be clearly defined. If clients remain with a business because of their relationship to you, a company’s founder, they are likely to view your departure as negative. A savvy buyer will want to create circumstances to lessen that blow for clients. A well-structured earn out is one way achieve this.

Depending on how the percentage of revenues and operational responsibilities are defined and structured, the original business owner will be “in” both financially and operationally but pass the baton to the new owners little by little every year with a set end point.

It’s vital to define what role you, as founder, will have during that period as well as afterwards. If your presence as an owner is the primary reason many customers are still around, your departure is likely to be a huge negative for the business (and possibly the brand). Buyers know this.

A thorough compliance review must be completed and all contracts and agreements need to be up-to-date. In addition to knowing which documents will require attention and review (non-disclosures, partnerships, buy-sell contracts and the like), knowing when contracts are due as well as who in the company is involved in each of the contracts’ delivery and operation is critical. This is the group most likely to hold the institutional knowledge to best support business continuity.

It may take 1-2 years for your business to operate in a way that will effectively attract the attention of a buyer. It’s likely to take 3-5 years of audited financials for quality buyers to get a feel for the company’s ups and downs. You will generally be expected to make sure financial records and transactions are sound, all paperwork is up-to-date and arrangements with key staff have been carefully reviewed. Depending on timing, you could opt to have the business evaluated by outside consultants to recommend upgrades and identify changes to unlock the business’ value. Such alterations might take time to put in place.

You’re likely to be under contract to stay around for a few more years. Let’s assume it is going to take 1-2 years for the business to operate in a way that will effectively attract a potential acquirer’s eye. An intelligent buyer will require at least 3-5 years of financials as stated earlier. Depending on the earn out and exit package created with the new owner, you might be expected to remain involved with the business in certain circumstances for up to 5 years to ensure the buyer gets the maximum value out of the business and your customers are happy with the transition.

The total is 6-10 years of planning and execution from beginning to end. It begins with shaping up the existing business for sale and ends with walking out of the door for good while leaving the business you founded in great shape.

When a business’ transition is under consideration, owners are advised to view the starting point of succession planning at several years prior to the earliest intended exit point. This “pre-plan” builds in ample time to determine a course of action (and change it if necessary), apply recommended tax or estate changes and maximize the projected financial benefits of the transition.

The other advantage of starting such planning early is addressing any unexpected changes within the industry, economy or family whilst accomplishing the exiting owner’s desired goals. This is not a single discussion but rather an ongoing process designed to save time and frustration when it is time to transition out of the business you worked so hard to create.

 

This article was written by Steven Abernathy from Forbes and was legally licensed through the NewsCred publisher network.

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