Succession and exiting a business are an often under appreciated and under planned for event in many businesses. "Succession" most generically really means passing ownership or key management roles to another individual or group of individuals and when eventually, you no longer are involved any longer. Succession and exit aren't necessarily synonymous with being bought out, from an internal or external buyer, but it often is for small businesses. However, most people think of succession commonly associated with an owners or executives retirement or exit at the tail end of their time in the business. This is a common mistake many businesses make and could be mitigated by following a few key practices that will benefit their businesses now as well as when succession time is upon them.
This kind of planning is critically important for business owners to secure their financial interest in their companies before, during, and after they exit. Beyond that, it is my belief they owe it to their employees, business partners if they have them, their communities and local economies as well, to ensure successful business continuity and thriving beyond their involvement. Their creation has turned into the livelihood of many more than just them as well as a being participant in the wider economic engine locally and even national if you think of the cumulative effect of small and medium sized business have on GDP and employment in our country. Plan well, execute effectively is the motto here!
Here are some common failure points for small and medium sized businesses when it comes to being positioned for maximum succession success
- Business Structure is not optimal - talk to your attorney and CPA for this but you may not be positioned well from a purchase standpoint but also for best tax efficiency perspective. Whether you're an LLC, C-Corp, or S-Corp, you'll need to identify your succession strategy and plan and then talk to your local experts to find out if/when you need to transition your structure. In some cases, it can take up to 5 years to totally restructure. You CAN still sell a business and transition ownership during that time but working ahead on this can mitigate a lot of stress and hiccups but will also make a purchase more attractive to buyers.
- Owner Compensation is Minimal - many owners I've met have not been paying themselves a salary or bonus in a direct way that shows up on their financials. This isn't any shady dealings by any means but is most often associated with their particular tax structure and how they integrate with other businesses and investments in their life. To be in the best shape possible, you'll need to clearly identify the compensation/benefits/perks of being the owner of the business and this includes direct monetary compensation. Talk to your CPA and a Transition Consultant such as myself to find out the competitive compensation structure for your industry to be the most attractive to a buyer.
- No Management Beyond the Owner - some buyers might be interested in taking over management responsibilities but if you don't have any other management structure in place when you want to sell you'll turn away a huge potential buyer pool of investors and other buyers who want to own a business but not be the main manager. Also, this also signals buyers that you as the owner probably wore MANY more hats than just a manager and so they'll want to know more depth about your responsibilities, capabilities, and skills that made your business the success it is. Having a COO, Supervisor, or Manager a few years prior to succession/exit can make this hurdle a non-issue and probably enable your business to grow a good deal prior to you leaving, which increases your potential purchase price as well!
- Process and Employees Aren't Positioned Well for a Transition - if your processes aren't documented, clear, and as standard as possible, buyers will sense a potentially insurmountable learning curve to learn your unique business practices. Get them documented and standardized. People side, they need to have their expertise, capabilities, and value to the business clear for buyers and managers transitioning in. Not only to keep the business running efficiently and effectively through the transition, but to provide your employees grounding and justification for their maintained employment beyond the owners transition.
- No Long Term Business Plan - standard practice for medium and large companies is annual strategic and long term planning to keep the machinery focused and aligned for success. Small businesses can learn from that rhythm, especially when it comes to preparing for an exit and succession. Buyers will want to see some past performance history but also get a clear picture of your industry, trends, market awareness, customer profiles, risks and opportunities, as well as growth opportunities in the works or waiting to be seized. There needs to be some facts, data, and meat to this document and it can take a little time to put together. Once you get over the initial hurdle of making one, you can update on an annual basis with much less effort and be positioned well for your exit. Additionally, this will keep your key risks, opportunities, and plans in front of you and moving forward that can again, raise the current growth and profitability of the company and thus the potential sale price of your business.
- Owner Doesn't Have an "After Exit" Plan - many owners I've talked to, customers or otherwise, have great intentions, some plans and actions in the works, but also seem to be delaying their exit in part because they don't have a clear idea of what and who they'll be post exit. If you've spent 20-30 years in your business, often you ARE your business, and so leaving it will be incredibly disruptive in many positive and also negative ways. Looking ahead and doing some level of lifestyle design and planning will immediately help you alleviate fears and uncertainties but also give you clarity on your transition that can be shared with employees, partners, and spouses when the time is right to do so. This is the place where I work with customers in my 16 Hour, Next Callings Experience to do just that.
- Not Planning for Succession Early and Often Enough - planning for business succession and exit is AS critical as proper personal estate planning. It's immensely important but not urgent and biting at your ankles to take the time and effort required. However, the negative consequences of not planning and positioning yourself and your business and experiencing an immediate need to depart are SO huge that you can't ignore it. Once your business is established, has a steady market position, employees, and your livelihood depends on it, part of holistic business practices ought to be ongoing planning and updates for succession and exit. It will benefit the business now in ways you won't foresee but will position your business for successfully transitioning and thriving beyond your involvement.
As an owner, one goal is to avoid being overwhelmed with adding an almost new job on top of existing responsibilities in life and business, so start early and understand the roadmap ahead for your transition. Seek the help of qualified professionals like Transition Consultants, CPA's, Certified Financial Advisors, Valuation Experts, and Attorneys. If you feel like you're not in the best shape for an upcoming transition out of your business or you'd like to get your succession foundation in place, please schedule a free consultation or via the Contact Page. Next Callings operates as a project manager for these transitions as well and helps simplify the complicated, clarify the vague, and remove the barriers to a smooth life and business transition. Contact us now for a free consultation.