When the partners of a small company organised the finance to expand their business, the future looked bright. With both of them in their early fifties, they knew they had a good decade to grow the business, move themselves out of its day-to-day running, and sell it for a small fortune. They had a plan and business was booming. They thought they were on track for a well-earned and extremely comfortable retirement.
But then the unthinkable happened: the senior partner suffered a heart attack and died. It was an appalling tragedy. But it wasn’t just a human tragedy; it was also an economic disaster. Left without instructions and wanting a fast resolution, the grieving widow understandably opted for a quick sale. Already highly leveraged, the other partner couldn’t raise the cash to buy her out. The resulting fire sale delivered a fraction of the company’s worth. If, as seems likely, the business now collapses, it will leave employees without jobs and the supply chain out of pocket.
These business partners believed that because they had an exit plan, their business was safe. However, as this true story shows, adequate succession planning is more complex and far reaching than most business owners imagine.
Manage the risks
Succession planning requires you to consider three major areas of risk that may not enable you to:
- leave when you want to;
- realise the maximum value of the business when you do; or
- keep the business running without you.
However, how you manage these risks depends entirely on your personal objectives. There is no ‘one size fits all’ succession plan. Some owners are happy to stay involved in their business well into their 70s; others want to be able to sail their yacht to the Caribbean the day they turn 60. Some desperately want their business to remain in the family; others want to reward their loyal staff with equity. Some need to retain ownership; others are happy to hand over responsibility and walk away free with a bag of money.
It doesn’t matter what you want. What matters is you have the choice. A 35-year old owner of a successful construction business has a five-year exit strategy. He’s going to make his money and have a sea change at 40. Because he has a good succession plan, while he’s surfing his business will still be going, paying him a dividend and continuing to employ his staff.
Establish a suitable structure
Whether your eventual goal is ownership succession (selling the business), or management succession (finding a new CEO but retaining ownership and some level of income), you will need to structure the company so that it can function without you. As a minimum, that means formal governance systems; protected IP; well-documented systems and processes; and formal contracts to lock in key staff, customers and suppliers.
In a management succession, you will also need to bear in mind that it can take as long as five years to find, train and mentor the new CEO. Even if that person is already within the business, they may only know their part of it, and it can take three to five years to get them across the whole entity. In any case, setting aside this time provides you with the necessary space to ensure your successor is right for the job. Making the wrong choice is only a disaster if you don’t have time to correct it.
In an ownership succession, it will take a similar length of time to prepare the business to stand up to due diligence. Purchasers are all too aware that in small businesses, most of the goodwill sits with the owner.
Unless your business can run without you, a new buyer may only pay what the business is worth if you agree to stay on for a defined period of time – perhaps up to three years. This isn’t a big deal if you’re 45. But at 55 it’s irritating; and at 65 it’s a catastrophe. You should also bear in mind that, to get the best sale price, you may have to wait out the market. Business sales are like real estate and you don’t want to have to sell at the bottom of the market.
Create an ongoing legacy
Good succession planning takes care of you, your family, and the community that relies on your enterprise. It is about laying the foundations for the longevity of the business after you’ve gone, and about securing an exit deal that’s good for you and the people you care about. Good succession planning caters for both the expected and the unexpected; is done early, reviewed regularly and is based on sound, independent and expert advice. Good succession planning starts now.
FOOD FOR THOUGHT...
1. What are the ten largest risks to your business?
2. How are you managing the aspirations of your staff?
3. What sort of management information do you generate every month?
4. Do you know how to structure your business to get the best tax outcome from its sale?
5. Have you discussed your succession plans with your spouse?
6. Does your spouse share your vision of the future?
YOUR BUSINESS IS AT RISK IF...
1. Your customers have a relationship with you, not your company
2. Your supply chain is held together with handshakes and ‘gentlemen’s agreements’
3. You are the only person who knows how every bit of the business works
4. Your key staff only stay out of loyalty to you
5. Your intellectual property is in your head
6. You are using your personal assets as security for your business
7. You don’t have contingency plans (or a disaster recovery plan)
