Congratulations on having built a successful business. But how will you fully release the value of that business for the benefit of your family?
Succession planning sounds like the sort of thing you do when you are approaching 60 but in reality you should be thinking about this much earlier. It is as much about risk management as it is about ultimate retirement!
Succession planning is really about making yourself dispensable in your business or at the very least, reducing the reliance on you. If the future of your business is totally dependent on you, then its value may well be lost or substantially diminished if you were to suffer a long-term illness, become disabled or die. Effective succession planning must therefore include considering the unexpected as well as planned events.
Build and protect business value
Succession planning is about ensuring that the value of your business is protected and is capable of being released at some point. It will consider issues such as:
- Dependence on particular individuals (not just the business owner)
- Documented systems and procedures
- The quality of your customers, contracts and restraints on key employees
- How are you developing your team?
- What steps should be taken to prepare your business for sale?
- Can the business run without you now?
- How can you optimise the value of your business?
- Who are potential purchasers of the business?
- What role does insurance play in protecting your family?
- What would a due diligence investigation of your business reveal?
- Do you need to sell to achieve flexibility as you grow old or can the business be self-sustaining?
Our view is that the best succession strategy is to ensure that the business is addressing all of the above issues now, not just when a potential purchaser appears or when you reach the point where you want to sell. In this way you are building and protecting the value of your business.
One of the things that we have found over the years is that cashing out the value of the business may not be the best financial decision. With fewer and more discerning purchasers in the market, more and more businesses will continue with managers in control and owners being more passively involved.
Releasing business value
But when it comes time to sell the following factors will play an important part in determining the value that is released to you:
- The profitability of the business – although past profitability is important it is the future profitability that you need to convince a purchaser about. So building a business with sustainable profitability is important.
- Assets tied up in the business – the more you have tied up in tangible assets such as stock, debtors and plant, the lower the value of the goodwill which is what you have built. So ensuring fast inventory turnover and low debtor days will lead to more value available to be released to you.
- Risk will influence value – Like any investment, there is a trade-off between risk and reward when considering how to value a business. So the higher the risk attached to your business the less someone will pay for it. Conversely, the lower the risk the more they will pay. So consider the risks that are peculiar to your business such as dependence on individuals, suppliers and customers and manage or mitigate these risks – this will enhance business value.
- Consider who the likely purchasers will be. Is there are compatible business that would benefit from merging their business with yours? Is your business attractive to a standalone investor? Do you have a market niche that makes you attractive to a particular purchaser? Is it possible that your management team could be the purchasers, with or without you continuing to hold some portion of the business?
We act for many small to medium sized businesses and are very experienced in assisting businesses in effective succession planning. The starting point is to perform a business diagnostic which identifies the areas that you should be working on and then to set about addressing each of the issues so that a succession path becomes clear and is easily pursued. We would be pleased to discuss how we could assist you as you consider succession in your business.