Five Things Business Owners Should Keep in Mind With Succession Planning
Selling the business is the end game for many company founders. Smart business owners plan their succession, even if they are not ready to sell in the immediate future. It’s about having a certain mindset.
Having an exit strategy (in place or at least sketched out) gives owners a leg up so they can be prepared, educated about the process and able to recognize a valid offer and achieve success in the end by finding a good suitor and a good sales price.
Selling and buying a business is very much like dating: Each party wants to look her or his best. There may be embellishment of the facts in the getting-to-know you stage and both parties may want to know what the past has been like but they are ultimately more focused on what the future holds. Being ready for this process shortens an owner’s learning curve when the actual time to sell arrives.
Here are a few considerations for sellers:
1. Many buyouts require a multiyear agreement and tie the compensation to a customer-retention percentage. Success in this area revolves around good communications with clients by demonstrating that a well-crafted business transition plan is in place and that the new ownership will enhance the customer experience. Customers want the process to be seamless and wish to know the product or service they will receive from the new owner will not be any less than what they received from prior one.
2. If you intend to pursue selling or transitioning your business, become serious about understanding the true value of your company. Unrealistic valuation expectations lead to many deals breaking down. Doing your homework on valuation in your industry is a smart move. Knowing key factors that drive value for your competitors enables you to focus on these elements as well as accentuate what sets your company apart.
Bringing buyers into the valuation process improves the success of the deal. An important step is for both parties to agree on the valuation method to be used since businesses can be assessed in various acceptable ways. This allows for both sides to present an “apples to apples” offer.
3. Decide whether it makes sense to value your company mostly on recurring revenue (appropriate for a sales or service firms) or on the assets it owns (useful for a manufacturing organization).
Service businesses are best valued on revenue and profitability since there are few hard assets, while production assets of companies in manufacturing tend to be substantial drivers of valuation along with revenue and profitability.
4. Mentor your future buyer. Many practitioners like doctors, financial advisors, lawyers and CPAs have ready-made buyers in their practice by having interns or the like who are being mentored and trained to be professionals.
Other businesses can add programs by working with local universities and trade organizations to cultivate relationships with individuals seeking mentoring relationships. Both sellers and customers prefer knowing the successor owner for a while before the transition happens. Mentoring the next generation is a great way to make this happen.
5. Every business owner should know the following factors: customer cost and profitability, the systematizing efforts that will drive down cost, why customers come to firm and not the competition and how to implement growth drivers. Rest assured, your buyer will want to know these key elements and knowing your business well makes you a better seller.
Planning with the end in mind is a good strategy. If you know your business succession plan, even if it is 15 to 20 years down the road, you can manage your growth along the way, target specific customers, hire strategically, develop mentoring relationships with the next generation and network to find potential buyers. Being in a selling mindset will be good for your business, no matter when you plan to do so.