For most small business owners, the idea of even considering a succession plan pops to mind only when tragedy strikes or the owner starts giving serious thought to retiring or otherwise getting out of the business. However, succession plans have much better outcomes when owners plan for them in advance. Here are five issues to keep in mind when considering this critically important topic.
1. Assembling your advisory team (at a minimum, your business lawyer, accountant, financial advisor) and respecting the process.
Successfully transitioning ownership of a small business in a manner that maximizes value for the parties involved takes time, effort, and expense. Process, planning, and implementation all count. It is wise to assemble your team of key advisors to keep everyone on the same page and to plan ahead.
2. Identifying potential successor(s) for your business.
Are there family members involved with the business who are both capable and interested in taking over when you leave? Are there senior managers who might be potential buyers? If the answer to either question is yes, then the time and energy to structure and consummate an ownership transfer can be significantly lower than if you conclude that you need to put your small business on the market for sale to a third-party buyer. Once it is time to put a succession plan into action, a business broker or intermediary can be a valuable resource in helping a business owner navigate the process, structure and negotiate business terms of a deal with a potential buyer, and help shepherd the deal through its various steps to a successful closing.
3. Determining the current fair market value of your business (a realistic value).
Expert business valuation advice is highly recommended. There are several ways to measure the valuation of a business based on assets, projected income, or on the market value of similar businesses, and an experienced accountant or business appraiser can help you determine a reasonable value for your small business (understanding that small business valuation is almost as much of an art as it is a science). Part of this process will involve a deep dive into your business structure and day-to-day operating processes, procedures, staff, and other intangible factors to assess whether the business might easily be sold to a third party or whether its true value is significantly dependent upon the personality, talents, and relationships controlled by the owner.
4. Defining the business owner’s key objectives for the future.
This discussion often includes the challenging process of striking a delicate balance between retiring from the business and the need to retain control and stay involved in some capacity.
5. Preserving the status quo and promoting a seamless transition to the new owner.
Assuring that the key members of your team are properly trained, motivated, and loyal to the business is vitally important to maximize the value of your small business and the chances for a successful ownership transition.