Why do I need to do succession planning?
Ask yourself the following questions:
- How would the business continue if something happened to me?
- Would there be an orderly transition of the business?
- Would our client/customer needs continue to be met in a timely fashion?
- How would the business be liquidated?
When evaluating the first question above, be sure to consider the potential death, disability or other personal factors, not just for yourself, but for your entire management team and any other key personnel. You may have been the founder, and/or sole shareholder of the company, but the successes of your business was most likely the result of a team of highly qualified personnel. Addressing one’s potential demise or disability is difficult, but considering it while you are healthy will help reduce your anxieties about what the future might hold.
For the business to continue, make sure you provide for installation of stable and solid management during the transition period. A common goal amongst transferors and transferees is to make sure any change is seamless to their customer base. Whether they are seeking a product or a professional service, customers have needs and those needs must be satisfied without a hitch.
Consider having a professional business valuation prepared for your business. This should assist you with developing a range of values to reasonably expect when you begin to actively market the business. Valuations are prepared for many different reasons, so be certain to discuss your purpose with the valuation company. Valuation methodologies vary as well, so consider their anticipated approach in your specific situation. A well-documented valuation report can be a valuable negotiating tool in justifying your asking price.
Timing is everything, as most businesses have a life cycle. They have an inception, a stage where they cannot support themselves (i.e. startup phase), they may then have a period of rapid growth, then maturity, and finally, termination. The segments of the life cycle can be influenced by new management, new sources of capital and new services or products. Identifying where your company is in its life cycle is important to your valuation team.
Look for ways of enhancing the overall value and appeal of your business, such as getting your accounting house in order and discussing all relevant legal matters. The due diligence process conducted by potential purchasers and their representatives will include close examination of your accounting and legal matters.
Getting your Accounting House in Order:
- Maintain a good environment for internal controls – an accounting system that safeguards your assets is an essential business tool
- Be prudent in regularly preparing financial statements with proper cutoff – this shows potential purchasers that you cared about your financial information
- Promote efficiency in processing transactions
- Take good care of your human assets (employees!)
Legal Considerations:
- Governance – make sure your corporate minute book, articles of incorporation, bylaws and/or operating agreements are in good order
- Ownership agreements – make sure your ownership agreements, buyout documents, etc. are well written and understood by all parties
- Customer and supplier agreements should be accessible and include specific terms with specific time frames
- Lease agreements – all lease agreements should be in writing and current, with no defaults or unexpired terms
- Intellectual Property Protection – any patents, copyrights, or employee assignments should be secured
- Key employee agreements should be in place with incentives and/or noncompete agreements where needed
Be sure to seek legal counsel to get a professional opinion on the items above, and any other recommendations they may have from the legal side.
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Potential Sale Strategies:
Most owners have three potential exit strategies as their business matures: internal sale, outside sale; or no sale.
Internal Sale – It is important to choose the right individual and to structure the transaction appropriately. This buyer is typically motivated to perform and supports a smoother transition of the business.
External Sale – Sales to an outside third party typically take longer to come to fruition. You and your professional advisory team will have to analyze the financial and tax aspects of an asset sale vs. a stock sale, and work with the potential buyer and his or her advisory team to achieve your desired results. This strategy will often involve more due diligence from the buyer’s side.
No Sale – Make sure you allow for the unknowns and the possibility that your business may not sell. Even the best succession plans sometimes fall through.
There are a lot of resources available on succession planning matters. In many cases, your business may have been your life’s work, so put your best foot forward to get it across the finish line. If you would like to hear more about how to develop your own customized plan, please contact YHB (Yount, Hyde & Barbour, P.C.) Principal Tom Moler by email at tom.moler@yhbcpa.com or by phone at 703-777-7739.
