If you own a business, at some point you are going to leave it. Think about it. You might sell it. You might just wind it down. You might (and hopefully know) die. I am a big advocate of at least considering what your succession plan is, based on your own personal goals. Our firm is really excited to have Dr. James W. Lea, Ph.D. speak at one of our client seminars on August 24th about the topic of family businesses and succession planning – it's really the only problem that all business owners have in common.
A lot of people don't know where to begin so they don't talk about it – or keep putting it off. The purpose of this post is to give you some ideas about how you can at least get started on a framework for your eventual succession plan.
Step One – Identify Your Financial / Life Goal
If you are like most business owners, you have some sort of idea about a financial goal for your retirement – even if it’s not formalized. The first step is to identify your financial goal. Based on this goal (e.g. I will need $2m by the time I am 65) you can determine whether or not you need to count on selling or liquidating your business to reach your goal. Assuming you can earn enough through profits of the business, you’ve got a lot of flexibility in that you don’t need to eventually sell or liquidate.
Step Two – Pick a Strategy
First, remember that your strategy can change – just pick something and get started, as each strategy requires lead times and specific steps.
Strategy 1 – Sell External
If you're going to sell externally, you need to give yourself about five years, at least, lead time. Plan on taking about a year to actually sell your business, which means the preceding four years should be spent readying the business for sale. You'll need to get the business running without day-to-day reliance on you and with a strong management team in place. (See Michael Gerber's E-Myth for thoughts on this). You'll also need to figure out how to demonstrate sales and earnings growth if you're looking to maximize your offer.
Strategy 2 – Sell Internal
If you're going to sell internally, you'll need to give yourself at least two to three years lead time. It will probably take six months or so to create the plan and documentation, so most of the other time should be spent figuring out who within your company will have the wherewithal to purchase the company. You'll also need to figure out financing (will you finance, will a bank finance)? In this environment expect seller financing OR partnering with a private equity firm – in which case you'll need to pursue a strategy similar to Strategy 1. The days of bank financed ESOPS are really over so don't expect an immediate payout.
Strategy 3 – Transition to Family
If you're going to transition to a family, depending on the value of your business, you probably need a year to two years. You'll need to identify the family member (typically someone working in the business) and then spend some time working out how to make things 'fair' with other family members. You'll need to prepare documents and determine a strategy (e.g. sell, gift).
Strategy 4 – Liquidate
This takes the least amount of time – you just wind down relationships with customers and vendors and then determine a partner to assist in liquidating your inventory, machinery, and other assets as appropriate.
Step Three – Communicate the Plan
Start having conversations with your trusted advisors at this point as they are going to help you along the way (e.g. attorney, CPA, financial advisor). Consider getting a dialogue going with the person you'll be transitioning the business to if you're picking Strategy 2 or Strategy 3. If you're pursuing Strategy 1, consider getting to know Merger and Acquisition firms that specialize in your industry or geographic area. This team will help you formulate a plan you can execute based on the time frame associated with your strategy.
If you haven't taken these steps, don't worry, you're not alone. Most business owners don't think about an eventual succession plan until they are ready to be out of the business, at which point they typically experience frustration at the options and time involved to maximize profit on a sale. By following these steps you will get the ball rolling in the right direction.
Are you ready to take the first step?