Securing your business succession plan before it’s too late is just as valuable as growing your business. Your succession plan is your retirement or exit strategy, and each business owner has his/her unique path.
Starting a succession plan early and including business advisors, such as attorneys, accountants, investment bankers, or financial planners will help ensure a successful and smooth succession path.
There are several succession options. This article focuses on the 2 most common:
- Generational/Internal Succession Planning: Transferring your business to family or key employees
- Third Party Sale: Selling to a strategic buyer in the industry or a financial buyer (i.e. private equity firms)
Each of these paths have their own unique planning strategies, and pros and cons to consider in order to protect your business from a journey down a rocky road in the future.
Generational/Internal Succession Planning: This path requires early planning to bring the next generation into “the know” regarding operations and strategies of the business. The key issues to consider for this type of succession plan are:
- Identification of a family member or employee that is interested in taking over the business. If your goal is to maintain the Company’s success, be objective regarding analysis of talent and respectful of other’s professional desires.
- Consider bringing family/employees along over a number of years by promoting them to officer positions and allowing them to “buy-in” over time.
- Start engagement early to permit successors to learn while the senior level is still engaged.
Third Party Sale: Don’t worry if you don’t have a family member or key employee to transition your business. Many business owners sell to a third party that is either a strategic buyer (often a competitor that can achieve synergies and grow through the purchase) or a financial buyer. Financial buyers typically are private equity funds that are looking to grow the business with a plan of selling in 3 to 5 years. This is often a way for a business owner to get a “second bite at the apple” by investing in the fund and working as a consultant until the business is re-sold. The key issues to consider:
- A buyer (strategic or financial) will want to see at least 3 years of financial performance.
- Use your attorneys to ensure your legal matters and contracts are complete – engaging attorneys early in the process helps keep contracts organized and negotiated properly and your financial records up to date; this will help to streamline the sale and keep diligence costs and stress levels low during the sale process.
- You also may want to consider using an accountant to assist with business valuation to ensure that your net sales proceeds will be sufficient to support your non-working lifestyle or your next venture.
- Additionally, you could consider hiring an investment banker to run a process to increase exposure to potential buyers, effectively raising the value of your business.
Preparing your business for the future is a journey, not a destination – so engage the right team to help you choose the right path!