Business Succession Planning: Begin at the End to Maximize Your Return

Business Succession Planning: Begin at the End to Maximize Your Return

If you’re a business owner, deciding when and how you will pass on or sell your company should be an intentional decision. Starting at the end means thinking about what you want to gain at the time of your exit, whether that may be to sustain your lifestyle in retirement, to ensure the business continues to support employees and their families, or to invest in another business.

By planning for your exit several years in advance, you increase the likelihood that you will reap maximum value from your business, however you may define “value.” Business owners who delay or neglect business succession planning often set themselves up for a disappointing outcome, as they face limited options and rushed decision making, which may compromise the financial transaction and/or the legacy they have invested in for so many years.

These steps illustrate how to begin succession planning with the end in mind:

Define your goals

Starting a minimum of three to five years before you want to leave your business, think about what you’d like your life to look like afterward. If you’ll be leaving to retire, focus on what life will cost and how much you’ll need to live comfortably in retirement. If you plan to leave the business to continue with a different venture, calculate how much you’d like to gain from your business financially to invest in those plans. Then set a goal of building the business to a value where, upon transition, you can acheive your ideal return.

You may set nonmonetary goals as well. Maybe you’d like to leave the business to your children or your employees, for example. Or perhaps your business centers around a cause you strongly believe in, and you want to ensure the company’s continuity. Whatever your goals may be, write them down so you can remind yourself as you go of the rewards you and your community will reap from your actions.

Understand your exit options

Next, look at how you might achieve the goals you’ve established through an appropriate exit plan. Research alternatives such as these to determine your ideal path:

• Transferring the business to a family member (or members)
• Transferring ownership to employees through an employee stock ownership plan (ESOP)
• Selling to key employees or partners through a management buyout (MBO)
• Selling to an external entrepreneur, private equity firm or competitor
• Closing the business after selling off its assets

Build a comprehensive financial plan

Drafting a financial plan that details your long- and short-term financial goals, and how you intend to achieve them, can help keep you on course toward your ideal exit plan. Include everything that can help you and your partners or other key managers make decisions that are in the best interest of your company, employees, customers and other stakeholders.

Your financial plan should provide a comprehensive view of where your business is today and where you are striving to take it. Transparency into your sales standings and forecasts, costs, cash flow projections and other financial metrics can help you allocate resources effectively, monitor progress toward your goals, and plan for future revenue and expenses, as well as market challenges and opportunities.

A well-thought-out financial plan can help you strategically build the value of your business, while making needed course corrections along the way. It will also be an important evaluation and working tool for successors or investors.

Strengthen and grow your business

Assets, earning potential and market reputation are all essential factors in an investor’s decision to acquire a business, a partner’s decision to buy out another partner, or a leader’s decision to move up and take over for a retiring or otherwise exiting leader. In the years that precede your exit, work on every one of these areas to ensure the strength and appeal of your company.

Some ideas:

• Make meaningful upgrades to your technology and equipment to keep all areas of the business at top efficiency.
• Bring in key advisors — financial, legal, tax, etc. — to ensure you are positioned to meet or exceed your revenue and profit goals.
• Continually improve your customer service and customer experience to build satisfaction and loyalty.

Identify and develop your successors

If your succession plan includes assigning family members or employees to key positions, document your responsibilities and teach those emerging leaders how to do your job so that the leadership transition will be as smooth as possible. Help them develop any new skills they will need and consider formal leadership training where that may be beneficial to the long-term stability of your business. Provide mentorship, give them increasingly challenging assignments and offer rotational training so they can learn how every aspect of the business works.

Don’t go it alone

Developing and implementing a business succession plan requires expertise in areas ranging from legal and tax structuring to wealth management and business valuation. Bring your advisory team into discussions early on and ask them to recommend specialists as you need them. Your financial advisor, CPA, business banker, attorney and other trusted advisors can help ensure your transition plan is sound, recommend enhancements to your plan and help you achieve your financial goals.
 

This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. Any reliance on the information herein is solely and exclusively at your own risk and you are urged to do your own independent research. To the extent information herein references an outside resource or Internet site, Dollar Bank is not responsible for information, products or services obtained from outside sources and Dollar Bank will not be liable for any damages that may result from your access to outside resources. As always, please consult your own counsel, accountant, or other advisor regarding your specific situation.