The nation faces a succession-planning (also called transition or exit planning) problem.
According to a recent PwC study, 44% of family businesses report succession planning as an issue.
It’s a process some tend to balk at for a variety of reasons, including the complicated details, emotional component, financial matters, and an unknown future.
However, succession planning can help ease the challenge of determining a business’s future and make it as smooth as possible.
Plan, Plan, Plan
Sources suggest succession planning is best approached as a three-pronged process: financial evaluation, business development, and the human factor.
“What most people want to avoid is liquidation, of course,” says Lori Moen, former awards-and-trophies business owner and current executive director at Catalyst Group ECR. This business specializes in coaching and exit planning. “There’s very little wealth to be harvested from that path, and as an owner, you lose that legacy you worked so hard to build.”
According to Moen, there are solid steps to take to start the journey.
1. Assemble a team: Owners and anyone else invested in the transition should gather trusted advisers to support the process. That may include business consultants, accountants, tax planners, and attorneys. This step matters no matter the size of the business, whether it’s staying in the family or being sold to an interested third party.
2. Budgeting time: Mapping out the exit plan with several years’ off-ramp can give you the best opportunity to get the most out of your company and legacy. Moen notes that in her last four years owning a company, she began honing her exit plan. “I focused on setting up some standard operating procedures, knowing who my top customers were, being diversified, doing the steps to get it ready for sale,” says Moen.
3. Get a valuation: It doesn’t need to be a full valuation, but it can give you an idea of what you can bring the business to market for. Have a clear picture of your expenses and whether you run your business to minimize taxes.
4. Build the business: Customer diversification, vendor diversification, and reduced owner dependency are all critical to understanding a business’s potential value, particularly if a financial owner is looking to buy. They often focus more on the future value the business can offer than the legacy.
Build Up Your Team
Employees are also an important component of a business’s value.
“That institutional knowledge is so critical. As the owner, if you were to step out of the business, how would it do for three months? Would it thrive? Would it survive, or would it fall apart?” Moen asks.
Moen emphasizes recognizing and building employee skills during a transition. She points out that she almost missed out on a very qualified buyer during her sale: her shop’s general manager, who ended up buying the company.