Business Succession planning for businesses, especially private companies, should be on the a top propriety in the planning area. Whether the sale will be to top management, middle management, family or to outside sales, it should be an ongoing planning concern.
A number of private established company’s do not have any such planning, and newer companies in where the owners have no family to take over have the same problem. In both situations there is a challenge to create a succession plan.
Business succession planning could be the hardest planning of all. However, it is a must in planning. It is the only way the current owners can guarantee that the wealth of the company will either be passed on and continued, or the wealth is transferred to the families through the sale of the business. Without the succession plan, the largest potential of business wealth can be lost forever.
The lack of a Succession planning is the reason why many stockholder owners walk the floors at 2am. They have a true concern for the successor of the firm and the protection of the wealth of the firm.
Some of the questions that the owners of firms have:
- What if I die or become very sick?
- What if I lose my key person or key group?
- What if don’t want to do this any longer?
- What if there is an economic downturn and I can’t recoup?
Other areas of concern are:
- If I want to sell, when do I sell?
- What is the business worth?
- Does the senior management want to leave and retire, or stay active?
- Can the main group of owners afford to retire without creating a cash flow crunch?
- How vulnerable is the company if key people leave and take the secrets with them, or even start their own business, using the company’s business model, or share vital business secrets?
The questions discussed above along with many other questions, are the basis of the planning and will help the planning team of advisors guide the owners through the maze of planning traps and opportunities as they walk the path together.
Succession planning can be a long process. During the journey however, many other issues can develop and be resolved as the owners come to some conclusion and focus on where the business should be upon a triggering event for succession. I like to call it the “Pathway to a more and profitable business state”.
Quite often, because of certain business arrangements, the business is forced to discuss business succession. A few areas would be the purchasing of corporate life insurance for key people and owners. The financing of a line of credit. The purchasing of corporate assets, among others.
The best business succession plans are the plans that the owners and their advisors have worked on together. The could consist of the team of a CPA, attorney, bankers, life insurance specialist, a financial advisor, and merger acquisition advisor. Not all of the advisors are involved at once, but over time, they all share in discussing the planning thoughts and ideas. This prevents overlapping and time abuse. It creates great ideas and open mindfulness in the planning with one focus, creating a market for the business, and potential buyers.
Once the decision is to sell the business in the future, the advisors need to start the process of preparing the business to be sold. This can be years from this point. It’s similar to when you know you will be selling your home, so you start the updating procedure.
The advisors know what purchasers are going to be looking for, so they create an audit as to whether the company has them in place or not. For example; future buyers want to buy into strong management positions, as some don’t want to be involved daily with the business, but want the personnel there to manage it. If there is no key group running the business, the advisors will start the process of creating that element. This could be anywhere from finding the right people, to setting up benefit planning and vesting schedules, along with other compensation packages. It would also include covenant’s concerning company secrets, and non-compete agreements.
Another area which the advisors look for is the business worth, or market value. The owners may have their own opinion of the value; however, they are well served by getting an appraisal from a professional business appraiser dealing in that type of industry.
Consequently, by getting the company ready for a future sale is where all the building blocks start to make the business as appealing to as many future buyers as it can.
Having a company appraised will give the owners the opportunity to review their capital structure, fix any account irregularities, and to make sure the debt to equity ratios are in line.
Early appraisals can be instrumental to the owners to help them to make the accounting adjustment’s needed. An appraisal can be costly, but the information owners can get from it is priceless in the long run. The owner learns through the valuation process how other similar companies are valued. This allows for more focus on building the value in their companies.