The typical response from business owners to “planning for their succession” is “I have years to prepare”. Grooming a successor can take years and even if you plan to eventually sell the business you cannot start to prepare early enough.
No one can predict the circumstances or when you may be forced to step aside. In fact it may already be too late to start! Your primary asset may have to finance thirty years of retirement or the future of your dependents and so preserving and sustain can never commence early enough.
Owners think that they will live forever and that no one can do their job as well as them. Their influence and control becomes so embedded in their business that in their absence, it will cease to function. Consequently the market value of their business is much less than they envisage. To increase its attractiveness to a buyer and consequently the price an owner needs to be detached from day to day operations. Ask yourself the question “What would a purchaser do with this business?” and then you can envisage how it should be presented for maximum value.
During a transaction it is too late to prepare. Starting preparations before a transaction is even in sight will help position sales value at the top of the price range. A buyer wants an operation that can easily be absorbed and a seller wants the minimum of conditions.
Preparing for succession does four things:
- Improves the value of the business
- Improves the return in the interim
- Mitigates risk for a buyer
- Minimizes sale conditions
Owners often offer as a rationale for not needing to be “sale ready” that they know who their eventual buyer will be, often a competitor seeking scale, market share, or other commercial advantage. Knowing that you have a purchaser is some comfort but does nothing for the price. Preparing the business, in much the same way a realtor would stage a house will see the potential price increase.
Owners underestimate the significance of their involvement in management. A buyer wants a business that will perform as well as it did before the sale and an active owner (who is no longer around) will be a barrier to that. An owner can anticipate this and take steps to be succession ready at all times:
- Organizational discipline – an organization chart and job descriptions signify that employees know their roles without supervision. They indicate lines of authority and function to enable it to operate in the temporary absence of leadership.
- Alignment – every communication with employees positively reinforces the culture and fosters engagement. Owners will say they want one thing but have incentive plans that motivate different behavior. Poor alignment signals poor engagement and dysfunction.
- Performance Discipline – objective measures and process, ideally metrics driven with predetermined targets and payouts are preferred. Discretionary incentives lacking formal feedback signify subjective and inconsistent performance standards.
- A Talent Plan – an owner can never predict when they may have to relinquish management control or when key employees are going to depart. Identifying who the key employees are and having a realistic replacement contingency plan is an important tool that will mitigate risk for an owner and be valued by a buyer. Progressively removing the owner from day to day management should be a part of this plan.
These processes are often taken for granted. They require minimum maintenance, are easily transferred to new management, and will generate value either through a heightened sales price or interim profitability. They will place an owner in a stronger position to negotiate and ensure that the business is prepared for an unforeseen event.