Business Succession Planning
Business Succession Planning refers to the process of preparing a company for a change in ownership, ensuring a seamless transfer of assets, operations, and leadership to new owners while preserving value (which might be the current management team). This strategic planning enables business owners to exit their company on their own terms, maximizing the value of their business and securing their legacy.
Business Succession Planning is crucial for business owners in order to:
1. Maximize business value: Proactively preparing for succession can sharply increase the sale value and marketability of the business, ensuring a better financial outcome for the owner. Involuntary events can lead to shutting down, or at best a fire sale of the business, resulting in a significant erosion of value.
2. Protect against the unexpected: Involuntary events like death, disability, divorce, or illness can force a business owner to leave their company unexpectedly. Clearly, such an unexpected departure can lead to confusion, uncertainty, and disruption among families, employees, customers, and suppliers. Succession planning ensures that the business is prepared for such events, where all the people and pieces are in place minimizing the risk of financial loss and ensuring a smooth succession.
3. Ensure continuity: Succession planning guarantees that the business can continue to thrive, even after the owner's departure, preserving their life's work and legacy. Planning also allows exploring creative structures such as the owner’s gradual wind-down while still working/consulting for the business part-time.
4. Meet personal goals: By planning ahead, business owners can achieve their personal goals, such as retirement, pursuing new ventures, or philanthropy. Without a plan, the business may be forced to close and the business owner's life's work and legacy lost, along with the value they've built over the years.
Key Components of Business Succession Planning:
1. Assessing business readiness: Use modern tools to evaluate the company's current financial, operational, and organizational readiness for succession (which may be years down the road).
2. Setting goals and objectives: Next, define the ideal Succession scenario, including recommended business improvements, desired timeline, potential sale value, and owner’s post-succession role.
3. Evaluate: Consider which potential succession pathway may be the best fit.
4. Tax and financial planning: Optimize the capital structure and company set up with an eye on tax strategies and financial arrangements to minimize the tax burden and maximize the sale proceeds.
5. Preparing the business for sale: Execute the plan developed above to enhance the business's attractiveness to potential buyers by improving operations, boosting financial performance, and maximizing growth prospects.
Final Steps:
Succession planning is a complex and involved process, requiring a minimum of 6-12 months to execute effectively, 2-3 years is ideal. Future-proof your business and your life; not unlike having a will in place, a viable Business Succession Plan provides peace of mind and ensures that your legacy is preserved.
Why It's Important to Plan Ahead
Aside from the Value Gap Concept outlined below. There are many valuable reasons to plan ahead and hire a consultant, one of the most notable is that company owners, leaders and managers often need a fresh set of eyes.
You’d be amazed at the amount of value consultants can add through keen observation and insights based on clear-headed analysis of the facts and application of best-in-class business practices. It's easy to fall into daily routines and biases without a critical eye toward measurement, analysis, and improvement. Albert Einstein once said, "Doing the same thing over and over again and expecting different results is the definition of insanity". Drawing on our specialized skills gained from experience working with many other businesses and organizations facing similar challenges, and the benefit of external perspective, we are able to look at the business from new angles and see new possibilities.
THE VALUE GAP CONCEPT
The "value gap" in business refers to the difference between a company's perceived market value and the price buyers are willing to pay. This gap is especially significant now more than ever as the baby boom generation begins to retire and need to sell their businesses en mass. Only those enterprises with strong fundamentals and growth potential will command their expected value, while others may face deep discounts or struggle to sell all together. Strategic planning and effective market positioning are crucial to bridging this gap and ensuring favourable retirement and legacy outcomes. Survey after survey by various third parties tells the same tale (see below)
To minimize the value gap, business owners need to prepare in advance:
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Consider the business’ current value in the eyes of purchasers
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Identify the factors that drive value in their eyes
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Identify strategies to enhance those factors to increase value
Numerous surveys predict over 1 Million businesses will be up for sale in the next decade:
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4 out of 10 business owners will leave their business within 5 years
(BDC – The Coming Wave Study)
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96% of baby boomers agree succession is important but only 13% have a plan
(Vistage International Survey)
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80-90% of owners’ financial retirement assets is locked in their businesses
(Exit Planning Institute Survey)
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40% of those that plan to leave have done nothing to prepare
(BDC – The Coming Wave Study)
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Phil Doublet, P. Eng
Business Strategist
