Succession Planning: It’s Not a One-time Event
You’ve built your business from the ground up over 20 or 30 years, you’ve poured everything into it, felt every loss and rejoiced in every win. But maybe you’re thinking it’s time for a change of scenery and you’re picturing yourself on a dock, on a beach enjoying the sunset, or spending time pursuing other passions.
But what is the plan to make that transition? If you’re not sure, you’re not alone. In fact, more than half of business owners do not have a succession plan according to a study from the Canadian Institute of Chartered Business Valuators. This is perhaps surprising, given that 50 per cent of business owners in Canada are planning to retire in the next five to 10 years according to a study by CIBC World Markets.
“People have delayed succession planning, perhaps because they don’t have a clear idea of how it will work with their business and personal goals,” says Nikki Robar, Chartered Business Valuator and VP of Deals at PwC in Halifax.
It’s not a one-time event that takes a day, a week or even a year to plan. It takes three to five years to put a comprehensive succession plan together. Business owners should start the process now, so their company can provide them with the financial liquidity needed for retirement; which, with some luck and the assistance of qualified professionals, includes time to enjoy many sunsets.
Business owners have a number of exit options: sell to a third party, a family member, an existing management team, or to investors. There are other options, like simply closing the business, but let’s look at selling a business as a going concern.
Market conditions are far different from 2008 when M&A activity was at an all-time low causing a lot of owners to shy away from divesting. In the last year, it was reported that there are billions of dollars in capital on the sidelines. Capital here refers to the cash, profits, venture and investment dollars that organizations and companies have been keeping in reserve or otherwise not re-investing in things like new products, innovations, acquisitions, and business expansion. So after years of flat or negative return on idle capital, both strategic and financial investors are now looking for growth opportunities via acquisitions or other investments. Combine that with attractive bank financing rates and you have a wave of capital that will flow most easily to the companies who are prepared for the opportunity.
A clear plan for succession will reveal a lot of details, including what the best time to sell is, how to maximize value and how to best transfer that value into retirement.
Business owners should thoroughly assess if their business is well positioned to take advantage of these improved opportunities to sell. To find that out, first there are a lot of tough questions to answer. Preparing a business for transition is no trivial matter.
So, if you want to be on a beach in 5 years, the steps you need to start working on soon are:
1. Identify a buyer
Determine who your potential buyers may be. Is your goal to sell to a family member, to management or do you offer the business for sale to the greater market? Whatever direction, understand who the most likely buyer of your business is so you can start specific plans to get your business ready for a successful ownership transition.
2. Determine the fair market value
Manage your pricing and valuation expectations. One of the biggest deterrents to selling a business is that the seller is seeking a higher price than the market is willing to pay. This is also the reason many negotiations fall apart. Get independent advice on what your company is worth early on, so you can be certain of what to expect, but also to take advantage of opportunities to enhance value prior to sale.
3. Order in the house
Make sure that your company’s financial information is accurate and well documented. Incomplete financial statements will turn away potential buyers. And, recent financial statements prepared by qualified accountants are instrumental in determining an appropriate valuation.
4. Increase value
Look for opportunities to increase the valuation of your business. A well-planned expansion or acquisition, ensuring key management is aligned with your objectives or dealing with non-operating assets in the business, may provide opportunity to enhance value.
Groom your company so it possesses the qualities that buyers are looking for. Here are a few ideas to get you started, keeping in mind the things that make a business “saleable” will vary by industry:
- Understand your market and how it would perceive your business as a possible merger or acquisition target;
- Build and secure a strong customer list;
- Remove redundant and non-core assets from the balance sheet in addition to “purifying” the income statement of non-business related expenses; and
- Have in place a solid management team.
- Your customer list and management team are critical pieces in a succession plan. Buyers, even if it’s family, will want to know the potential of your business going forward: a healthy recurring revenue base increases the chances of a successful transition.
A knowledgeable management team is also critically important, especially if you’ve been the brains of the operation for a while. Buyers will want to be assured that when you leave for the beach, the knowledge and skill you’ve accumulated remains as part of the ongoing management.
“The buyers want to walk in, buy the business and have no fear that when you retire … all the value they’ve just paid for is going to stay there,” explains Bill Armitage, Chartered Business Valuator and Partner at Ernst & Young, LLP.
All these steps represent a lot of work. Don’t tackle them on your own. Assemble a team of experts who can help. It should include your accountant, lawyer, a chartered business valuator, your management team, and you.
Keep in mind, that if succession is not properly planned, owners may have no other option than to simply close up shop, particularly if an unexpected event necessitates an exit that is much faster than expected.
Unfortunately, this happens all too often. There’s a divorce and that process drains business, and often personal coffers, ultimately impacting retirement plans. Or, if plans are not well thought out, owners encounter unpleasant snags resulting in costly buyouts or settlements.
Ideally, you should start planning five years out. You can exit sooner, but you may have to adjust your retirement plans. Understanding your alternatives and being prepared to be flexible will improve your probability of success.
Sue Loomer is a Chartered Business Valuator, member of The Canadian Institute of Chartered Business Valuators (CICBV) and Managing Director of Campbell Valuation Partners Limited in Toronto. (firstname.lastname@example.org, 416-597-4525)