Succession Planning Best Way to Get Top Dollar For Your Business

Growing up in a small business environment, watching your parents work harder and harder to make a good life for us as children I believe that my parents probably worked too hard and didn’t give themselves the opportunity to maximize the value of their businesses before retiring.

Succession planning should start earlier, not at age 65 when people retire, but several years before in order to determine an exit strategy which either passes along the family business to the siblings or to get the businesses ready for sale.  In Canada according to a CFIB (Canadian Federation of Independent Business) 70% of small businesses owners will retire in the next 5 years.  That provides 2 business scenarios for small business owners, one, that the businesses will be hopefully passed along to one of their siblings in order to quickly deal with the succession planning issue or two, that there will be a lot of small businesses coming up for sale.

But I believe that one of the biggest hurdles to succession planning is that small business owners who have had businesses for a long period of time actually think of their businesses as being part of the family like another child and there’s the emotional tug of war on deciding to give up the business even to their children if that’s the route they choose.  The more difficult decision is to decide to sell the business to an outsider and that’s probably one of the biggest reasons why people outside the business might view it as procrastination, but to the small business owner it could be more an emotional factor.  My parents were already past retirement age when they decided to sell some of their businesses and hang onto a few others.

This delay hurts both the employees of those businesses as well as the owners in that their is a definite lack of plan of going forward and the owner’s passion has already waned and they’re no longer really interested in running their businesses, but don’t want to necessarily letting go.

These businesses have been profitable but the owners’ have had a hard time taking time away from the day to day running of the business, or taking a step back to look at their business at the 10,000 foot level and trying to setup their business to become saleable at the most attractive price.

A study released late last year by business transition specialists ROCG Americas found only one in 10 owners received a price for their business near what they wanted or expected. The primary reason given was improper or lack of planning.

ROCG conducted the survey in North America and found that businesses with revenues between $1 and 100 million said that they were either too busy to plan for a business sale or it was too early to start thinking about it, even though 84% of them said it was important to their retirement plans.

“Many business owners are not aware of the complexity involved in the succession planning process, particularly in executing a divestiture transaction,” says Michele Middlemore, vice-president of Aon Corp.’s M&A Transaction Advisory Group. “Almost always, they underestimate the time and work and difficulty involved in getting something like that done. More often than not, they tend to postpone dealing with it and are not prepared adequately when the time is upon them.”

Businesses should be planning 2 or 3 years in advance for the divestiture.

One of the big ideas to put in place is the movement of the value of the business is from the business owner to that of the business itself.   Since small business owners are generally the drivers of the business, it’s usually been in the sales and marketing roles and this is one of the areas which has to be transitioned over to the company.  This is easier said than done, in that one quite often that there isn’t the bench strength to take over and this has to be brought into the company.  Their might be changes in technology which might be needed to brought into the company as well to allow to compete better.

One can look at the succession planning in a way is like embarking on a new business plan and here a corporate financial advisor can help with getting an independent valuation of a business to let owners know where the strengths and weaknesses lie and what to expect as a potential starting point for a dollar value of a business sale.

According to the Business Development Bank of Canada, business succession is a process that requires thought, planning and time to arrange and execute: “Whatever your definition of success, making the commitment to let go of the business and place it in the hands of someone else is perhaps the critical factor that ensures your business transition goes smoothly and profitably,” the bank notes.

Just remember though that succession planning shouldn’t be determined by what the economy is doing or the stock markets, but by personal circumstance, if you’re ready to retire, then you should be planning for it in advance by 2 to 3 years.  The process is a complex one and is similar to building a new business plan, except that you’re trying to help build for the next set of owners’ to succeed and by doing so you and your family will get top dollar for your business you have built over the years.

Written by Richard Wong, CMA [email protected]