Can You Transition out Happy, Without Worry, and Wealthy?

 

 

There is a trend of ageing business owners., many baby boomers who will soon be considering retirement. What options do they have? What is the best approach to succession planning? Should they Keep, transfer/gift, sell their business?

Retaining passive ownership

An owner can retain ownership, playing a passive role in management but turning day-to-day management and operations over to key employees, this can prove difficult as it would require identifying talented key employees must able to manage and operate the business. Another hurdle could be that the business owners have a substantial amount of their savings tied up in the company, they would have to find a way to fund their retirement.

Transferring ownership to the next generation of family

A successful transfer would require that family members in place are interested in running the business and such family members have the necessary skills and capabilities to manage, operate and fund the working capital of the firm as well as the retirement of the current owner of the company. Lucrative family transitions require years of planning and preparation. A proactive exit plan should be in place and implemented at least five years before an exit date. The health and longevity of a family business depend on a well-executed transition plan. To whom should the business be transferred? In the distant past, to determine the best choice, the owner should consider if any children are interested in working in, running and managing the business. Which of the children have the skill set to manage successfully and to operate the business? Would the children need outside assistance, temporarily or permanently?

Transition affects us all differently

In a recent study by the Allianz Life Insurance Co. of North America on people’s beliefs and attitudes about legacy, they found that there are significant gaps in what young adults and their parents expect from and define as an inheritance.

The personal attributes of ethics, morals and faith are significantly more highly valued than the financial aspects of inheritance.

Parents should be initiating, or allowing, open meaningful conversations about family business legacy and heritage. But be careful If someone is silent and does not provide input during the discussion, it does not mean that the person agrees. When parents notice that someone is silent, they should encourage them to participate more fully, asking for opinions and any thoughts on the matter at hand. When parents allow all to participate the agreed-upon desired outcomes is easily achieved

Selling the business

Planning should be taking place now to obtain the maximum value even if the transaction does not happen before five to ten years.

The top factors that determine a fair sale price are summarised in the acronym FISH:

F- financial strength- The company financial performance as a standalone entity and compared to others in the industry will have a significant influence on the value of the enterprise. What is the cash flow? Would future financial performance look good? Are growth potentials well documented?

I- Income concentration and customer loyalty: Sales drive revenue and value in business. Revenue concentrated among too few customers may reduce the value of the company because the loss of a small number of customers has a dramatic impact on revenues. Stable and loyal customers with a high proportion of recurring revenue mean steady cash flow, reduced downturn and will certainly increase the value of the business.

S – Squad: The Management and the sales team should be able to perform successfully independently of the owner. Small firms that rely heavily on the proprietor for sales and management increase the risks for potential buyers that the business cannot survive the owner departure and they will make a lower offer.

H- High reliance on proprietary product or services: If a business has created their technology, process, product or service and can protect it, the value of the company will be significantly enhanced.

Are you ready to exit at any time?

Businesses need experts at every step of any exit. Remember, most business owners have not been through acquisition, divestiture, transition or succession planning. “I’m not ready yet” is a common response when I probe my clients about their succession plans. People claim they are too busy, they will do this critical planning later or that because they are a family, everything will just magically work itself out.

Sometimes, it occurs to me there are issues of fearing mortality and loss of control that are affecting their desire to discuss and plan their exit. Company owners should remember, every business will transition to the next owner or disappear, whether it is planned or not. If they do not put a plan in place, the outcomes will certainly not be optimum.

Every business owner should initiate — or complete — a business transition plan, considering the following items:

  • Creating and implementing a succession plan takes time, often years. It’s never too early to start the planning process.
  • Get ready by starting the conversation with family, employees, shareholders and visioning what the future of your company may be. We are seldom acutely aware of everyone’s desire.
  • Starting succession planning does not mean you are ready to hand over the business now. It just means you are planning for when you are ready to let go.
  • Not having a succession plan in the event of an untimely death or disability can create real hardship for the family and the business.
  • Having a succession plan in place is often a big relief to both the owners and their family and all business stakeholders.

A good succession plan is a good business plan. By the time, it’s complete, you, your family and your business stakeholders will have a roadmap for where you want to take your operation, resulting in faster, more efficient decision-making.

Just as important, a well thought through succession plan gives adequate time and attention to preparing the next manager to take over the responsibilities of the business and the after-business life of the owner.

Can your business survive without you?

Take the free mini value builder test

If you wish to build up the value of your business and would want to explore what you could do to make it sellable, please do not hesitate to call Jean-Bertrand de Lartigue on +44 1656 766 363 or email him, jb@exit-planning.co.uk

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