by Alan Boyden

It’s an inescapable fact that private business owners will eventually transfer ownership of the businesses they’ve built. Most owners do not like to think about an exit strategy, but a strategy is precisely what’s needed in the form of succession planning.

Succession planning is simply laying out your intentions. It’s deciding when and how you’d like to leave the business, who you’d want to leave or sell the business to, and how to fund the transfer or sale. The time to plan for succession is any time the business is worth more than the liquidation value of its assets.

Proper planning can help ensure the continuation of your company and supports a smooth transition when the time comes. Advanced planning can also provide more financial options and lets you realize maximum value out of the business.

The most critical resource of succession planning is time. It takes time to investigate the right strategy, determine valuation and compensation details, find a buyer, or groom a successor. The more time you have before a successor or sale becomes necessary, the better your business’ continuity.

A longer time frame also affords the ability to react to changes in ownership needs, changes in the market, or shifts in mergers and acquisitions activities.  

There are several important elements to succession planning. The details will vary depending on the characteristics of the business and the goals of its owner. The key is to develop a succession plan that meets your main requirements. And that starts with a series of choices.

Decisions, decisions, decisions

Every private business owner must first determine the goals that will help shape his or her succession plan. There can be several objectives to consider, other than increasing the value of the business. For instance, an owner may need to try and reduce the risk involved through a transfer, determine when to cash out of the business, or transfer wealth to family members or charity.
Other considerations are equally important. Does the owner wish to sell to an internal buyer such as family members, co-owners, or current management? Or to an external buyer, a competitor perhaps or private equity group? Should the business be sold in stages through Employee Stock Option Purchase, minority shares as incentive to management group, or minority shares to private equity? Or sold 100% at once to the identified buyer?

Entrepreneurs find it difficult to retire, and many want to continue working in their businesses for a time even after a sale or succession. Regardless, all owners certainly expect to make money from a business they’ve spent their lives building. Some are more concerned with maximizing their personal net worth; others want to see continuity in their businesses as “independent” companies that continue to serve employees and customers.

Again, owners must weigh in with their desires in order to develop an appropriate plan.

The financial side of succession

Whether pursuing internal or external succession plans, owners must still convince someone that their businesses are worth buying. Deciding what a business is worth is a challenge with which most owners have difficulty.

In general, there are three valuation criteria to consider: quality or earnings over time, and not just the last good year; rate of retained earnings needed to fund growth or the overall strategic plan; and rate of growth potential of current market or products.

Keep in mind that there is additional value in “soft” assets, or “goodwill” which can sometimes eclipse the “hard” asset value of things like equipment and real estate. It all depends on the business’ management and current product, market, and customer base.

No time like the present

Developing a succession plan is one of the most crucial moves a business owner can make. Get the conversation going today. Otherwise, you may not have a say in your business’s future.

About the Author

Alan Boyden is a Wipfli partner whose focus is on assisting manufacturing clients attain their business goals, develop a game plan, and implement a performance measurement system to track the results. To learn more about succession planning, please contact Alan at aboyden@wipfli.com.