There are two areas small business owners have a concern in:
- When the business has no apparent successor to take over.
- Where the business owner has young children to succeed him, but they are too young to include in the planning at this point. This is a void period should the owner want to leave, become sick or die.
Succession and Exit planning can be the most difficult planning a business owner can accomplish. However, it is the most necessary planning a company can undertake to protect the value of its shareholders and their families over the long term. Succession planning concerns are often what keeps them up at night, giving them an uneasy feeling of a task not completed, the loose ends!
Succession planning is the natural outgrowth of strategic planning. In reviewing operational and financial goals, the need to ask a series of hard questions such as;
- Should we keep or sell the business?
- If the business is to be sold, how do we decide when we should sell?
- What’s the business worth?
- Do the senior family members or non-family senior executives want or need to fully retire, or do they just wish to cut back on their work load?
- Can the owners afford to retiree without causing a cash flow crunch in the business?
- Who will take over the business if the owner died or become incapacitated for the extend period of time?
These questions and answers can help the company advisors craft a plan to reach the owner’s succession goals. The answers will require the input of several different professionals with different skill sets. The team includes the accountant, lawyer, valuation expert, corporate financial advisor and insurance representative who has the expertise in setting up the funding liabilities.
Even if there is no clear successor in place, it is prudent to consider several options for the business succession of the closely held business.
Once the decision is made to sell the business, the owners and advisors need to begin the process of preparing the business for sales, and ultimately finding a buyer. Keep in mind, the thought of selling the business could be years in advance of the actual event. This give the business owner the flexibility of setting up systems and strategies to maximize the potential value of the business.
Key employees of the company represent a potential internal and natural market to purchase the company. If they do have the desire to purchase the company, usually, they don’t have the financial ability. However, the owner can be creative depending how much risk the owner wishes to take.
If the key group is not interested, the owners will look for an outside sale, either a strategic sale, or a financial sale. Strategic buyers can be companies seeking to expand their geographical reach or product line with the purchase of the company. Financial buyers like private equity firms, may also wish to purchase a company with an eye toward streamlining the company to increase its value for an eventual sale to a third party or public offering.
The process of building and preserving the value of the company for the benefit of the owners and their families need to start long before the sale. A professional business valuation will determine what the business is worth. The valuation professional can provide an unbiased range of values for the business based on accepted valuation methods that are free of biases of the business owner.
Owners always think their business is worth more than it is. A professional valuation is expensive, but a qualified valuation professional is worth the fee because he/she not only provides the valuation report but also can provide a wealth of information to the business owner about how similar businesses are structured and operated.
Once valuation is completed, the company can begin to address issues, uncover weaknesses, awkward and inconsistent balance sheet items, capital structure and debt equity ratios that may be outside the average seen in the industry. Improving these items can greatly increase the value of the business in the marketplace. These types of issues aren’t’ solved with a quick fix as it will take time to improve.
PLANNING SALE TO EMPLOYEES;
A WELL-RUN BUSINESS MAY HAVE SUCCESS IN SELLING TO THE KEY EMPLOYEE OR GROUP.
This is a result of hiring the right people and training them, giving them competitive salaries, and developing a business culture. If the process of developing middle and key people has been consistent over time, there could be a team ready to take over when the owner(s) are ready to leave.
Planning for the sale to a key employee or group can take much longer than planning for the sale to a strategic or financial buyer because this plan takes a commitment to develop employee(s) into the mindset of the business owners. This is woven in the business succession strategy and done by design over many years.
Preparing your business to maximize its fullest potential value takes time, systems, and education, along with other things. It’s like cleaning out your home, and repairing it, so when the time comes to sell, it’s ready.
Spending the time to create the key group or key person is well worth the effort. Most purchasers are interested more in the company’s systems and key groups, and the future growth of the company. By having the key person and key group you can maximize your future value.
Your Business Worth 