A mistake many business owners make is to believe they don’t need to develop a succession plan until they start putting their retirement plan together.
A good succession plan starts a long time before this. It may even begin when the business is first started or in its growth phase.
A strong, structured business committed to a defined strategy from the outset will always be more likely to succeed and have more long term value than one that is simply allowed to grow without a plan.
A good business needs to have:
- Systematised and documented procedures
- A clear client profile matched with an appropriately structured service offering
- Established goals and objectives
With such basics in place, a succession plan can be developed that will help the transition when the owner wishes to sell. In doing so it will make it more attractive to the acquirer, and thus maximise its value to the owner.
In order to structure a business so that it is “investor ready”, business owners need to ask a number of questions, including:
- Can the business operate without their personal input?
- Do they have a plan for their business success?
- Do they have a measure of how well their business is doing?
- What do they need to do to improve the business value?
- What format will their business be in when they look to realise its value?
- What kind of buyers would best suit their business?
- What is the minimum amount of dollars they require to meet their personal goals?
By having answers to these types of questions and implementing activities to bring about required changes in the business to strengthen it in the ways the answers suggest, can make a considerable difference to its final value and dramatically improve the chances of a successful sale.
Any good Succession Plan should also incorporate the personal goals and circumstances of the principal equity holders. These could include aspects such as:
- Expected time frame for the principal’s retirement,
- Timing of funding of the retirement, that is, 100% immediately or payment to be made over an extended period,
- Timing of transition phase from seller to buyer, and
- Work expectation and remuneration of principals in transition phase.
Considerations such as these will have a significant impact on the final transaction price of the business, and can create a major variance between this price and base market valuation.
One of the main reasons for business owners to ensure that they have a viable business succession plan and exit strategy is to maximise their return on the sale of the business.