Most business owners don’t think about succession planning until some big event happens, like a major health issue or a critical change in the business. Timing is everything in both your business and personal life, both of which extend to succession.
Here are some key questions to ask yourself as you plan ahead:
- How will human, financial, and other key resources provide reasonable returns?
- Is your plan to employ a family member or a person of trust to continue operating the business?
- Is the best plan an expansion or vertical integration for an existing client or competitor?
- Will the plan be a conversion, alternate direction, or straight acquisition?
- Is the opportunity suitably attractive to lure investment and motivate buyers?
Along with these questions, we must ask: how do we position a business so it can support a retirement or produce a fair value?
Firstly, the seller must look for value verification outside of the business and have a gap analysis performed to determine any weaknesses that could impact the transition. This process may ultimately lay a foundation for the best transitional approach.
The enterprise and its net assets should be capable of producing free cash flow that can be channeled into purchase repayment, measurable return on investment, or desired job creation. The gap analysis will identify which of these need to be worked on to develop an attractive business buy-out plan.
Business owners’ expectations sometimes require a reality check. While past business actions may have been successful, the way forward may not be the same. In truth, the world is quickly changing, and the plan must reassure the buyer(s) with a believable go-forward strategy.
The extinction of businesses, like the buggy whip factories of the 1900s, and Blockbuster Video of the 1980s and 1990s, points to a world of rapidly evolving technology. The best value is garnered from a business plan that follows promising trends and provides ample opportunity on returns. This way, it will help meet purchasers’ expectations.
My experience in business has built a belief that the requirements for a happy exit with fair value from the business consist of the following:
- Significant management synergy to carry out a smooth takeover with obvious, truthful continuity.
- The transition should be able to meet the needs of current and future clients.
- Sufficient satisfied clients that value the product or service offering, to ensure the viability of the business going forward.
Once a business is positioned to optimize the prospect of achievable returns, and it can provide a suitably attractive opportunity, it will lure investment and motivate buyers. The next step is negotiating a good deal.
With the myriad of legal and tax implications, the seller should seek professional assistance. Help is often required to implement processes that showcase the business while screening out illegitimate lookers. Experience shows sellers have significant emotional baggage and bias toward deal completion, which is a challenge in securing credible buyers.
In most cases, an experienced negotiator can overcome these and other obstacles.
“The window of opportunity for a successful transition boil down to strategic planning, timing, skilled negotiating and the patience to see it through.”
