Three stages of succession planning
There’s a lot to preparing a business for a new owner. Too many businesses do just one of them – offer their business for sale. A more strategic approach will lead to better outcomes. It can seem overwhelming to some business owners, so break it up into stages:
- Forming an exit strategy
- Getting the business ready for sale
- Selling the business
1. Forming an exit strategy
Business owners often discount how long it takes to prepare and sell a business. It takes years, and it needs to be a priority. There are very large risks involved with perpetual procrastination – a more stressful exit, a lower price, and a difficult handover. Agree on a plan and a schedule for all the steps.
Before you even get started:
- Acknowledge emotions
The thought of leaving your business will stir powerful emotions. This could interfere with decision-making and communication. Be aware and recognize when emotions are running high. Be patient and try to work through these emotions.
- Explain the process
Selling a business is probably an once-in-a-lifetime event for most business owners. You probably don’t know what’s coming and that often will make you nervous. Understanding roughly how it works and setting a schedule will really help alleviate anxiety.
- Figure out who the most likely buyer is
A lot of businesses are sold to family or staff, and that may require special planning. For example, the purchaser may not have the cash to buy the business outright. You will need to plan for a slower transition and staggered payments.
2. Getting the business ready for sale
The business needs to be at its best when it goes to market. Take care of all those things that you have been putting off. Staff should be fully trained, and business systems modernized. Consider forming an advisory board of experts to help get the business humming.
Some of the jobs to get done:
- Get the financial data in order
Smart buyers will want to see at least two years of clean financial data. If you have neglected your accounts, prioritize getting them fixed. Try not to claim any private expenditure as a business expense. Use online accounting software to keep records accurate and up to date so this doesn't become a rushed process.
- Increase the value of the business
This one sounds obvious but very few business owners do it. Figure out what drives value in the business and work on making those things even better. Similarly, start fixing the things that would give a buyer pause. You may need external consultants to help set priorities. With foresight and planning, this can make quite a difference to the sale price.
- Systematize everything you can
Review workflows in the business to make sure everything gets done as efficiently as possible. Look for opportunities to automate functions by using software and apps for things like accounts receivable, accounts payable, payroll, job costing, and expense management. Make sure all processes are clearly documented so a new owner can pick them up quickly.
3. Selling the business
You could work with a lot of external professionals at this stage. Brokers if you have a smaller business or M&A professionals if you have a larger business. You will also work with lawyers, CPA’s and possibly other professionals. Keep a positive mental note throughout these final stages. Understanding what to expect will help greatly.
- working with a broker or M&A advisor
- getting legal advice on a contract
- prospective buyers performing due diligence
Map it out and get started
Simply creating a succession plan can give you a lot of comfort. Even if the path is long, you’ll feel better knowing what the journey holds. And while some owners may be reluctant to talk about life after business, it never hurts to be prepared.
What’s the role of the advisor?
Succession planning requires a wide range of skills. More than any single professional – or an organization – can provide. As trusted advisors, however, CPA’s can guide business owners through the succession planning process.
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