Your Succession Toolkit, Part 1: PLANNING

This is the first in a three-part series of articles on succession planning. Look for part two in the next issue of Banking Business.

Successfully exiting a business is a dream for many owners. A financially-sound exit is certainly achievable, but it requires a period of hard work and planning to get the best return. We’ve assembled critical steps to follow when planning your exit, as well as actions you can take to increase the value of your business before you offer it for sale.

Good timing depends largely on what the market’s doing at any given time, but there are some indicators that can help you decide if your business is ready for sale:

• You’re confident of your business’s return-on-investment (ROI) value.

• The business has gone as far as you can take it.

• The next generation are ready to take over.

Map out your exit strategy

01 Consider the end game

Before you draft a succession plan, you’ll need to spend time giving careful thought to your personal and business longterm objectives.

Ask yourself these preliminary planning questions to create a succession plan that is in harmony with your goals.

Personal questions

• What is your main priority? Do you hope to maximize retirement income? Keep the company in the family?

• Would you prefer to maintain a part-time role in your business when the day comes or completely step away?

• What are your desired terms for payout? Would you prefer a one-time lump sum payment or regular payments over time?

Business questions

• What is your long-term vision for your company?

• Who might take over as your successor: a family member, business partner/employee or outside buyer?

• How could current positions in your organization be redesigned to best meet your vision for the future?

• What are your plans for the proceeds if you sell your business?

It’s wise to seek the advice of experienced financial, legal and succession planning advisors to make sure the outcome of the sale meets your objectives. These professionals can help determine the right financial structure for the sale of your business, the best way to market the sale and provide advice on tax and legal considerations.

Work with a business broker to find a buyer and guide you through the selling process.

02 Sell to a family member

Talk openly with family members before you identify a potential successor or successors and plan their development. Conduct these discussions in the workplace rather than at home. There may be only one realistic candidate, but you still need to be sure this person has the necessary skills and commitment. You might let them experience or try out different roles as you prepare for transition.

The most difficult scenarios:

• More than one family member wants to take over, resulting in stress and arguments.

• No one in the family that wants to take over, leaving you disappointed over the loss of your legacy.

• The only family member who wants the business isn’t suitable, placing the future of the business at risk.

• A key employee is disappointed that they weren't chosen, potentially leaving.

Giving more than one person equal standing in the business could cause conflict. If you do, make sure they share the same vision and plan and establish clear areas of responsibility from the start.

Your children will expect equal treatment. But this does not mean they should all take an active role in the business.

Keep your staff fully informed about key decisions. Your best employees are likely to be the first to jump ship if you keep them in the dark or they feel their prospects of advancing are now limited or blocked.

03 Sell to employees

Your employees may be interested in buying the business. Employees make good buyers because they already know and understand the business, hold relationships with your suppliers and customers and likely want to continue your business legacy.

However, an employee or group of employees may not be able to secure the financing required to give you a clean exit, meaning you will more than likely be asked to carry the financing. For example, you could be offered 25% of the purchase price from an acquiring employee and receive the 75% balance through monthly payments spread over several years. That could be a risky proposition if the new owner-employee doesn't run the business as profitability as you did, jeopardizing their ability to meet your payments as due.

04 Sell to a partner or team

If you have a partner or a senior manager, they may be interested in buying the business or acquiring your portion of the shares. If operating under a partnership agreement, you may already be bound by a buy-sell agreement stipulating the conditions and price for a sale of shares.

A manager who does not currently own shares might be someone you can groom to take over the business and pay you the asking price but, again, it’s more likely this employee will ask you to finance the sale. You might consider allowing them to acquire the business in stages, buying part of it each year for a number of years out of their share of the profits, as you continue to take your own share of the profits until the deal is complete. Consult your advisors for input before agreeing to an arrangement like this.

Give the management team time to raise the money as they will probably have to approach the bank and investors. They will also need to be trained for their new roles as their skills and competence may be a key issue for the bank and any investors funding a deal.

05 Sell to a buyer

This is often the easiest and cleanest exit; find another person or company to buy your business outright. This avenue can be the most difficult to negotiate because you'll likely need confidentiality agreements and various disclosures. Finding the right person to acquire your company also requires accurate knowledge of the market as well as investment in improving or maintaining performance, so your business is a strong strategic or financial asset.

Buyers may come with conditions that can include an extended transition period during which they shadow you to learn every element of the business’s day-to-day operations.

The lion’s share of a business’s value is in its operations rather than its assets. So if you strip it for parts, you won’t get a true return on your investment.

06 Close down

Some businesses just close down. It’s more common with businesses that have a key principal as the owner and it’s difficult to transfer any value or goodwill. Consultants as a operating as a sole proprietor may struggle to find another person to buy their business.

If you decide to close your business, then you’d liquidate your assets.

07 Keep the business and hire a CEO

With this strategy, you decide to keep the business but delegate management of it to a third party. You may decide to retain some or all of your shares, providing ongoing income and some control over the business. This is a popular option when a business is generating a lucrative cash flow and the owner is reluctant to give that up, or the return generated from the business is significantly more than if the sale proceeds were invested.

Decide when to depart

01 Plan ahead

Plan well in advance and consider family, finances, your health, any business goals you’ve yet to achieve and the state of your industry. Choosing an exit date early on, even if it is an estimate, will make sure you can depart when the time is right.

Because succession planning involves complex decisions that can take up to five years to complete, it’s recommended you start early. Early planning will help:

• Have enough time to plan effectively for retirement or the next phase of your life. Instead of being forced to retire because of ill health, a sudden offer to buy the business, the industry is slowing or you’ve just had enough, it’s better to exit on your terms.

• Communicate the idea to family. Some may wish to take the business over, some may not. There will be numerous issues to discuss if you have more than one obvious heir. Early agreement will reduce the impact on the business.

• Prepare your staff to know that you won’t be there forever, and to put in place systems or documents that will help replace your expertise.

• Groom the business to get a better price, by focusing on increasing profit, locking in any contracts or suppliers and generally having a well-run business.

• Sell when conditions are perfect, such as a growing market or seasonal upswing.

• Increase the odds of your business surviving without you, by being able to slowly put in place contingencies and plans for others to take over.

02 Breakdown your exit timeline

Set and work toward deadlines for completing your succession plan. Some business owners break their plan into sections, setting firm dates for completion of each one.

• Personal future planning (retirement, lifestyle, estate considerations)

• Business housekeeping (grooming the business for sale)

• Successor mentorship/training for the buyer

• Handover and transition

A clean exit is easier for you but staying for a period may bring you a higher price as it’s less risky for the new owner.

03 Staying in the business

A buyer may want you to stay on board for a period of time (six months to two years) to help oversee transition of the business (and, perhaps more importantly, to hold you accountable for any promises). Will sticking around impede your future plans to start another business or enjoy retirement? It’s important to determine what you are willing to do for the buyer in terms of your own transition commitment before sell.