Getting succession planning wrong
If you are keeping up with these guides, you might remember last time I was explaining a little about Succession Planning in Business. This next issue is about what happens when you get it wrong.
Firstly, let’s look at some success stories to get you thinking about what you need to do.
What success looks like
Research indicates that less than 30% of business owners adequately prepare for a transition of the business, and in fact, over 70% of business owners who sell the business for the primary reason of retirement profoundly regret the decision. (Source: Exit Planning Institute State of Owner Readiness 2013 Report)
A successful transition should involve transferring the business at the maximum value based on the owner’s review of their emotional, personal, financial and tax situation as well as a review of the business life cycle stage, the probability of sale-ability and timing of the market. A forced transition plan in the case of death or disability should also be prepared.
Poorly prepared business exits rely on luck and a roll of the dice to be successful. Whilst the people in the following pictures are fictional, their stories are based on research of the consequences of what can go wrong when a business owner(s) decides to sell or transfer ownership in a business.
Now I am the type of person who does not like to indulge in the negative too much so let’s talk about our next subject:
What happens when everything goes right
This is some real life successful sales.
“I sold the business for double what I thought I could three years earlier. The buyers were lining up and we sold the business in under four weeks.”
“I have enough money after the sale to live a great lifestyle during retirement… I feel good about myself and have already started a stage two reinvention of myself… I exited at the perfect time.”
“We managed to structure the sale to reduce tax and the wealth planning we did really added to the business sale proceeds.”
Look at each success story. What would you need to do in your planning to ensure these results for your business? Starting to make you think well good as that is the idea.
Tips on getting the business ready
Tips in the more common areas based on dealing with thousands of businesses that have embarked on this journey.
We have found through experience that many businesses have reduced the profitability of the business for tax reasons and, if this is the case, the true value of the business will not be clear from the financial records. This creates a significant problem when the business is being valued for sale, especially if the business is being sold on a multiple of profit.
Many small business owners argue they are too busy running the business to implement costly internal systems and procedures. With powerful and affordable accounting and management software products now widely available, even a micro business can produce detailed management information in a simple and timely manner. More automated businesses are more valuable businesses.
If a business does not appear in order, the business value goes down, therefore it is important for entrepreneurs thinking of selling to implement systems that will have the added benefit of increased productivity and profitability in the lead up to the sale.
During the due diligence phase, buyers begin tentatively but then quickly form a judgement about whether all the information provided is credible and whether the business has a good chance of continuing the income into the future.
The sale process will be delayed if the necessary documentation is not in place. Next week we will look at some tips to help you to get ready for this process.
Author: Kathleen Dale, Business Advisor and Founder of Compass Business Advisory.
Free Subscription Offer
How to stay up-to-date
Do you have an opinion about the succession planning for business owners exiting their business?
The TREN community wants to hear your story.
Become a subscriber to TREN eMagazine and be the first to receive local breaking stories, analysis and opinions on the Townsville real estate market.