Succession Planning: Timing Is Everything

Whether a business exit is decades in the future or just a few years away, planning for who will take over your company – and how – can be a process fraught with uncertainties.

Some questions you may have:

• Should I sell? 
• Will I be able to get the best price possible? 
• Will the new owner be as personally invested in the company’s success? 
• Will my employees stay with the company during the transition? 
• Will my children want to take over the business? If so, what is the most tax efficient way to make the transition?

Succession planning is a multi-faceted process, and in this article, we will discuss the key points you need to consider as you look ahead to exit.

Timing Is Key for Succession Planning

Look ahead to a 10-year horizon. This is the minimum length of time needed to accomplish a well-conceived succession plan. If you believe “it’s too early” to plan for business succession, think again. Even if you are relatively young and own a startup, thinking about how you eventually want to exit the business will shape how you grow and operate your company.

If your company is more mature, identifying your exit timeline and preferred methods of succession will help you home in on strategies to make your business as attractive as possible to likely buyers.

It Takes Time to Prepare a Business for Sale

• Evaluate options, rate them, determine priorities.
• Set goals. Why do you want to sell your business? Are you planning for retirement? Do you want to cash out and buy a new business? Are you looking to pass the business on to your kids?
• Talk to advisors such as your lawyer, CPA, and financial planner. And talk to your family, particularly if they will play a part in how your business will be transitioned. Discuss all the options, even if you think you know what you want. Be open minded. Work with your advisors to develop a written plan with goals, benchmarks, and deadlines. 
• Get a benchmark business valuation. You can’t measure the success of your efforts to improve your business unless you have a starting point. Getting a business valuation at the beginning of the process, and again when you are ready to sell, will quantify the value of your improvements and justify your asking price.
• Conduct a business readiness assessment – this helps establish a roadmap.
• For you, the owner, conduct an exit readiness assessment – assess risks, time frame, needs.

Get Your Documents Ready

Do you have a partner in the ownership of your company? If so, do you have a buy/sell agreement that spells out what happens if one of you wants to exit and the other doesn’t? If you don’t, now is the time to hammer out that agreement.

Other documents that need to be put in place to prepare for a business succession include:

• Insurance, including life insurance for you and your partner, if you have one
• Employment agreements with management staff
• Noncompete agreements
• Intellectual property protection
• Human Resources performance appraisals

There is so much documentation for a well-run business that it’s easy to lose track or let them become outdated but getting these documents in place is part of the process of building a best-in-class business.

Understand the Market and Ensure Your Business Has Value

You may have a hard date in mind for exiting your business, but an ill-timed economic downturn could scuttle that plan quickly. Be flexible. Set an approximate timeline for your exit and be ready to move quickly if market conditions demand it.

According to the BizBuySell Insight Report, small business-for-sale transactions accelerated 28 percent in Q4 2020. 

Despite ongoing hiring challenges and supply chain disruptions, this figure eclipsed Q4 2019 transactions; specifically:

• a total of 8,647 closed transactions were reported in 2021, compared to 7,612 in 2020, with 2,364 occurring in the fourth quarter, and 
• sale prices grew 16 percent year-over-year to an annual record high of $325,000, as buyers competed for a limited supply of strong performing businesses.

Data in this report also indicates that, despite 51 percent of surveyed owners being negatively impacted due to COVID-19 in 2021, key financials of sold businesses in the first quarter were the highest since BizBuySell began collecting data in 2007, with a median revenue of $688,020 and a median cash flow of $147,752.

This highlights the importance of preparing your business for an exit well in advance. Sixty percent of buyers indicated “profitability and strong financials” as a purchase requirement, while only 18 percent desired a business discounted due to poor financials.

Also, the market of available businesses to buy may become saturated. The report indicates that after nearly two years of managing through the pandemic’s fallout, many owners are deciding it’s time to sell. Retirement and general burnout remain the top two reasons for exiting, but pandemic fatigue specifically is motivating 43 percent of owners to consider selling their business.

The Time for Succession Planning is Now

Understanding economic cycles and working with advisors to plan ahead will help you prepare when the optimum time to sell hits.

As we said, timing is everything.

If you would like to get the discussion started on succession planning, please contact us.

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