As business owners near retirement, they need to consider what they want for the future of their business. To help ensure a successful transition of ownership, it is essential for business owners to design and enact a succession plan. But, developing a plan can be overwhelming – especially when you’re focusing on your day-to-day operations. So, where do you begin?
STARTING A SUCCESSION PLAN
Start by asking yourself, “What is my end goal?” From there, you can work backwards to develop an exit strategy to meet that goal.
Questions to consider include:
- When do you plan to stop working?
- Is your business ready to run without you?
- When you exit, who do you want to run the business?
- What kind of legacy do you want to leave?
These are all important questions to answer, but arguably, one of the most crucial aspects that affects each of those outcomes is the value of your business.
THE BUSINESS VALUATION
A key piece of any succession plan is a business valuation — a process to determine what a business is worth. The reality is that you won’t be able to operate and develop your business forever. A business valuation or appraisal can provide you with the information you need to put your succession plan into effect.
To obtain a business valuation, order an appraisal from a certified business valuation professional who is familiar with your industry. Even if you know your business, it’s important to have an independent professional perform the valuation, and explain their process and the final number. If selling, this valuation will help you establish and support a fair selling price and accept a fair deal. Don’t undersell or turn away buyers by overpricing.
If the decision is to sell, you may need to hire a professional broker to handle the sale. Work with the buyer to ensure a smooth transition and notify your managers, customers and staff of the sale. Honest communication will help to reduce conflict and relieve concerns.
TIPS TO INCREASE THE VALUE OF YOUR BUSINESS
If your business valuation comes back lower than anticipated there are things you can do to help boost its value going forward. Things to consider include:
- If you have a lot of debt, pay it down. If you have no debt, take a moderate amount on. Both will increase your return on equity.
- Review and strengthen your company’s competitive advantage.
- Make sure any handshake deals are converted into signed contracts.
- Diversify your suppliers as much as reasonable to help give yourself pricing leverage and help avoid major supply chain disruptions.
ASSEMBLING YOUR TEAM
Qualified professionals can help simplify the succession planning process. Professionals you may want to engage, include:
Succession Planning and Business Valuation Professional
When selecting someone to help you with succession planning and business valuation, consider the following:
- What credentials does this person hold? The most rigorous valuation professional designations include the Accredited Senior Appraiser (ASA) and Chartered Financial Analyst (CFA).
- How long has this person worked in the valuation industry?
- How many businesses like mine have they valued?
Certified Public Accountant (CPA)
Accountants can help in structuring plans to maximize profits and minimize your tax burden when you exit your business. If you’re working to adopt GAAP methods or improve financial reporting before a sale, CPAs can help as well.
Wealth Management Professional
Wealth Management Professionals can help you manage your finances and plan for the future.
Ultimately, building your business and exiting your business are no simple feats. Retirement may be far off or just around the corner, but it’s never too early to start planning. In fact, it can take up to five years (or more!) to successfully build and enact a succession plan. A solid succession plan can help you and your business succeed, even after you’ve parted ways.
For more information on succession planning and business valuation, visit beenegarter.com.