For many entrepreneurs, the term "succession planning" may immediately evoke the idea of passing the torch on to a family member. However, in reality, succession planning is about finding the right exit strategy when you're ready to hand your business over to somebody else.
"One of the most important steps is first knowing all the options available to you for exiting," says Calvin Hughes, BDC consultant. "When you choose how you want to exit, it's important that you feel active and engaged in the process. But at the same time, you have to accept that you're letting go of your business," he emphasizes. Many business owners may be nervous about retirement and imagine "eternal golf or fishing." But ultimately, entrepreneurs should look for an exit strategy that gives them a sense of being worthwhile and fits their personal and business objectives. Here are some of the most common exit strategies used today.
Family transfer
If transferring your business to a family member is an appropriate strategy, it's key to ensure that your family is fully aware that you're planning a succession and to give them clear time parameters. A part of this, says Hughes, is ensuring that family members get a chance to voice their concerns and interest in the business. One of the most obvious advantages of opting for a family transfer, as an exit strategy, is that your family will benefit from your business legacy. As well, family members who are already involved in your business may require less coaching or involvement.
Management buy-out (MBO)
The purchase of a company by its management team is another possible exit strategy for succession planning. There are several advantages here for entrepreneurs:
- An MBO can ensure uninterrupted continuity when you hand over your business.
- Your new management team has invaluable experience.
- Your company is more likely to keep its existing clients and business partners.
Selling to outside interests
Selling a business to outside interests is the most popular exit strategy because it's typically "more definitive and involves fewer variables than a family succession," says Hughes. "Since you're transferring responsibility to someone else, it's imperative you get a strong indication of confidence from the buyer." Entrepreneurs should also be aware that the price they receive for their company might be more or less than the appraised market value. "While many business owners tend to overestimate the pricing of their businesses, a surprising number may underestimate it. For example, if your company becomes part of a much larger venture then the value may go up accordingly." A large corporation that is buying a business out, for instance, may be able to do more than you have with your business and willing to pay a higher price. "It's very important here to be vigilant about understanding the value of your business and how it may be influenced positively or negatively," he says.
Getting the full value for your business
Whether you're passing the company to a family member or selling it to outside interests, keep in mind that you will need a business valuation that establishes a realistic and fair dollar number on your business. "Putting that dollar value on a business takes time and you need to have a specialist who can look at your assets, liabilities and goodwill with an objective viewpoint," he adds. Hughes says that he has seen too many cases of entrepreneurs who got caught at the last minute and weren't able to get the full value that they had envisioned.
For entrepreneurs who choose selling as an exit strategy, Hughes feels that they should also be aware that buyers are increasingly more sophisticated and demonstrate more business savvy. "Smart buyers will certainly delve more into your business history. So in turn, you have to anticipate this and be sure that you're armed with the right figures and backup material to get the value that you're looking for. You don't want to find yourself in a vulnerable position," he stresses. Company owners should also keep in mind that the value of a business is not just based on financial statements. "The number of customers you have, for example, could also be a determining factor," he says.
Planning ahead
"Planning ahead, at least 18 months to 2 years, helps entrepreneurs make better business decisions," he adds. The earlier you start, he believes, the more time you can take an objective look at your company and where it will be down the road. Succession planning takes time, Hughes stresses, because of many complex issues such as business valuations, tax implications, family matters, and coaching successors. And that's precisely where advisors such as BDC Consulting can come in. Hughes recommends that entrepreneurs rely on external help to appraise their business, evaluate their personal needs and draft their succession plan. "Objectivity is one very important issue here. You want to be counselled by somebody with no conflict of interest," he concludes.
