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Most of us don’t like to think about our own mortality. But as the owner of a closely held business, you have a responsibility to plan for what would happen to your company if you were to unexpectedly die or become disabled.
Without a succession plan, the future of your business could be at risk if this were to occur. Failing to create a succession plan could also be financially dangerous for your family and employees who might have to scramble to pick up the pieces in your absence.
Here are 6 factors to consider as you think about creating a succession plan for your business.
It’s never too early to start thinking about business succession and creating a plan. If fact, you should have some idea of your eventual business endgame on the day you start your business.
It takes time for a business succession plan to evolve and take shape. Therefore, you should start thinking seriously about business succession and creating a plan at least five years before your planned exit from the company.
Give some thought to what your company’s future leaders should look like and the skills and character traits they should possess. For example, do they need technical expertise? What about people and management skills? These are often more important for leaders than technical or product knowledge.
Once you have an idea of leadership roles, you can start looking for good potential candidates. They could be current employees or you might need to look for outside talent. Your choice of a successor CEO, of course, will be most critical, so plan to focus most of your attention and efforts on this.
This will require you to take on more of a mentorship role with employees you’re going to tap as future leaders. In some respects, you may want to “clone” yourself by teaching them everything you’ve learned over the years about managing and growing your business. This will require an investment of time and energy, but it’s critical to help ensure a smooth succession.
Also think about what kinds of training and education future leaders will need and make sure they receive this during the transition period. For example, they might need industry technical certifications or advanced degrees (such as an MBA) or training in the areas of organization, leadership and strategy.
Business buyers fall into one of two broad categories: internal or external. Internal buyers are existing employees (especially top managers and executives) or family members (in a family business). Employee stock ownership plans (ESOPs) and management buyouts (MBOs) are commonly used to accomplish these types of purchases.
External buyers fall into one of two different categories: financial buyers and strategic buyers. Financial buyers include private equity groups that are looking for businesses with high growth potential that they can sell to realize a return on investment. Strategic buyers seek businesses with complimentary products or services. This includes competitors, who can gain market share and consolidate operations by acquiring your firm.
There are things you can do before listing your business for sale to increase its value in the marketplace. You should be focusing on these value drivers during the months and years leading up to the business sale.
Having clean and accurate financial statements and current, signed customer contracts is one value driver. Another is building a strong “bench” of seasoned, experienced executives and managers who can help ensure a smooth transition to new ownership. One of the main things buyers want to see is strong growth potential, so be sure to create a growth plan that’s realistic and attainable.
Many owners have a “gut feeling” about what their business is worth, but this value often isn’t realistic. The fact is, most owners have an emotional connection to their business, which they’ve built through years of sweat equity. So it’s hard for them to look at their business’ value objectively.
This is why obtaining a professional business valuation is so important. Buyers examine businesses from a purely analytical approach, based on what the numbers say. In particular, they will look carefully at the quality and consistency of earnings. Having a quality of earnings study performed by a valuation professional will help you estimate your business’ future cash flow potential, which will assist in determining an accurate business valuation.
Given its importance, you should consider engaging a professional to help you with business succession planning. Give us a call at (803) 791-1111 or send us an email to talk about how we can help you create a succession plan for your business.
Information is provided by William Amick & Blake Amick and written by Don Sadler,
a non-affiliate of Cetera Advisor Networks LLC.
This post is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
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Investment Advisory Representatives offer advisory products and services through Longleaf Advisory Services, LLC, a Registered Investment Advisor.
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West Columbia, SC 29169
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Investment Advisory Representatives offer advisory products and services through Longleaf Advisory Services, LLC, a Registered Investment Advisor.