Have you thought about Succession Planning?
Most business owners think they’re immortal… they’ll never die, never lose energy and motivation, they can control everything in their business. And then, one day, they wake up and want out. And often it’s too late – they have failed in the opportunity to plan for exit and consequently fail to maximise the value of their business. So what can you as the business owner do now to make sure this doesn’t happen to you?
What is Succession Planning?
Of all the concepts bandied about in business, succession planning continues to be much misunderstood and mismanaged. Succession goes well beyond exit and selling. For some businesses this may be the result, but the effort to get there should result in a more robust business that is prepared for ownership and management transition. Actual transition may not occur for many years, but effective planning will result in a business that can be successfully operated by future owners, through a sale, management buy-out, or family transition. It will also put the business in a much better place to deal with unforeseen events within the current management and ownership group.
Align strategy to exit
Stephen Covey’s concept of ‘begin with the end in mind’ is as important to business as it is to personal development. As a business owner we should strive to build a clear vision of our own exit strategy. Are you building a business with a view to sale? Is the plan to pass the business on to others within the business or family? Is sale of the business even a viable proposition? With a clear view of this end game we can ensure alignment with our business strategy.
What does your exit look like?
It is a misnomer that exit equals an external sale. Whilst this may be true of some businesses there are many options that can be dialled up during this process. Examples may include introducing equity participants, mergers with similarly aligned business, building the business to pass through to the next generation in the family, or a long term transition to existing management. Importantly, you need to understand the options that might work for you.
Understand if the business is saleable
Many businesses we see are not a saleable proposition. In the main, this is because there is no separation between the business and the owner. The goodwill only exists because of one person. In some cases this can be changed; through building management capability or expanding what the business does. In other cases this may never change. Regardless, the business owner needs to understand where their business sits on this scale.
The structure you operate through is particularly important at the time of sale. It can significantly impact taxation, and can restrict the ability to introduce future equity holders if poorly established. Importantly, structure can be expensive to change, capital gains tax and stamp duty are two major examples of often unforeseen costs in changing structure. Whilst it is important to establish business in the right structures it is equally important to consider the appropriateness of a structure for future sale as part of the succession planning process.
Understand value and the drivers of value
Well prepared business owners have a great sense of what their business is worth. Many will have had a valuation report prepared, others may have a good sense based on similar transactions in their industry. Importantly, this is a starting point; from a valuation, we start to appreciate what are the drivers of business value. There are two key considerations –
Profitability / cash flow
The first driver is how much money, ultimately cash, the business can generate on an ongoing basis. Understanding this driver can focus the business on strategies to increase sustainable profits.
Risk and rate of return
This recognises that investing in a business is a risk; what is the likelihood of those profits continuing into the future. The less risk of those profits dissipating under new owners, the higher the business value. Understanding the drivers of risk in your business allows you to build strategies around reducing them in the future resulting in increased business value. This could include strategies such as additional product lines, expanding the customer base or building management capability.
A common issue in succession is over reliance on the owners; and understanding whether this is actual or perceived. Some owners micro manage, holding a business back and stifling staff creativity and capability. Their perceived need to manage can result in the business failing to reach full potential. In other cases, reliance on the owner makes passing a business on to a new ownership group particularly challenging. Defining management roles within the business, facilitating easy replacement in the event of departures, results in a more robust business that is more likely to continue in the hands of future owners. An unforeseen result of this process can be that the existing ownership group may change the manner or timeframe in which they now wish to exit the business.