Most entrepreneurs are so busy running their businesses that they forget to ask the question: What happens if someone wants to buy my business? Or What happens if I want to retire? Or What if my children want to take over my business? At some point, whatever the reason, there will be a day when you will leave the business you started. Even as you grow your business, you should have an exit plan so that you can maximize your return on the investment you have made. Building equity in your business is the long-term profit of running a company. Most owners of small- and medium-sized businesses are not adequately prepared for business succession. Only 10% of business owners have a formal, written succession plan; 38% have an informal, unwritten plan: and the remaining 52% do not have any succession plan at all.
Having an exit strategy early in the life of your business will prepare you mentally for the emotional act of letting go. Knowing from Day 1 that there will come a time to relinquish control sets the stage for the actions you will one day take.
The three most profitable ways to leave a business are: selling the business, grooming a successor, or merging your business with another. And since none of these choices can happen overnight, you should allow yourself a three-year window to position your business for succession. Let’s look at what each of these succession choices requires.
Selling Your Business
You prepare to sell a business much in the same way that you prepare to sell a house. The business must be attractive both on the outside and on the inside. As with a house, you may want to do the equivalent of making some repairs and/or touch ups to make the business more attractive to interested buyers. You may want to invest a bit more in advertising or marketing to boost your presence. And, you will also have to disclose flaws and highlight the most attractive features. For example, “flaws” might be the fact that your lease may be up for an increase, or that a major client has left, or that there is a court action pending. “Attractions” might be that you have just signed a large client to a long-term contract, or that a new business that will complement yours has just leased the space next door, or that you have signed an exclusive distributorship with a hot new product.
Things that need to happen as you prepare to sell your business:
1) Review your last few years of financial statements with your CPA and consider what would be a fair price for your business.
2) You will need to market the company for sale anonymously so as not to interrupt ongoing business or disrupt employees.
3) After engaging a buyer, have them provide a Letter of Intent drafted by their attorney, and provide them with a confidentiality and non-disclosure agreements to discuss the business before disclosing company trade information or trade secrets.
4) Engage in discussion and put your negotiated agreement in writing. Include all Terms and Conditions of the sale: selling price, down payment if any, closing date, if during the transition there will be a training period etc.
5) Finally, before signing the sales agreement, conduct a due diligence check vetting the buyers to ensure that they have the income and the means to purchase the business at the time of closing.
Grooming a Successor
Identifying and mentoring a person who has the potential to fill leadership positions in the company is no small feat. Even if the person identified is a family member, having a succession plan increases the availability of experienced and capable employees that are prepared to assume these roles as they become available. Replacement planning for the key roles is the heart of succession planning. This means that when you hire employees, you make a conscious decision to hire people who one day may be capable of replacing you.
Organizations use succession planning as a process to ensure that employees are recruited and developed to fill key roles within the company. The succession planning process requires he founder/CEO to recruit superior employees, develop their knowledge, skills and abilities, preparing them or advancement and/or promotion into more challenging roles.
To find or groom the most qualified person for succession planning, the core objectives that are critical to effective succession planning must be utilized:
1) Identify those with the potential to assume greater responsibility in the organization.
2) Provide critical development experiences to those that can move into key roles
3) Engage the leadership in supporting the development of high-potential leaders
4) Build a database that can be used to make better staffing decision for key roles
5) Improve employee commitment and retention
6) Meet the career development expectations of existing employees
7) Counter the increasingly difficultly of costs of recruiting employees externally
Assessment is a key practice in effective succession-planning. Companies struggles to find practices that are effective and practical. Relying on a succession plan goes beyond merely discussing or instinct and guts. No part of the succession process should be rushed.
Merging with Another Company
Before you formally put your company into play as a seller, consider the possibility of a merger with another player in the same or similar industry, either locally or in another city. A competitor may be the ideal company to merge your business with if you plan to exit.
The merger of two companies that serve the same industry could use economies of scale to decrease costs and increase profits. For example, an accounting firm with 10 CPA’s merges with another firm that has 10 CPA’s. Software is a major expense for each. The cost of the software license is sold in tiers. Tier 1 allows up to 30 users. When the companies merge, they pay for only one Tier 1 license, thus saving a major cost, and allowing for greater profit. And since it is likely that the CPA’s in each firm might have a variety of clients, the merged company might be able to attract a wider variety of clients, thus leading to additional revenue and profits.
The value of the projected new profits would form the resources for the purchasing company to pay for your company. In these kinds pf sales only some of the money for the sale is paid at closing; the rest is paid out in the profit increase. It can be paid out as a salary or as a consulting fee while the selling CEO stays on to shepherd the company through the transition.
Mergers should be considered with owners you know really well and with whom you can work well. Mergers are tricky not only financially, but also politically, because the owners must decide how everyone fits into the merged business. Deciding the roles of all players and formalizing new processes and procedures is a major undertaking.
Conclusion
Succession planning is appropriate for every business owner. A written plan is similar to a Will for your business. It details what you want to happens to the business when you no longer wish to run it. A succession plan is a conversation you need to have with your company leadership and with your attorney. Don’t put off the discussion even if you don’t have a plan yet. The discussion will help frame your thinking about next steps or what you want for your future and the future of your company.