How to establish a succession plan — and plan a successful future
Courtesy / LinkedIn
Drew Oestreicher is senior vice president and senior client advisor at Spinnaker Trust in Portland. Colleen L. McCracken is a strategic business advisor at CLMC LLC.
While 96% of business owners agree it's important to have an exit strategy, experts say only 13% have a current written plan in place — leaving too much unknown for what comes next.
It’s time to dive deep into succession planning. We’ll uncover identifying readiness, finding prospective buyers, making your business more attractive for an offer and how to seamlessly transition the hands of ownership.
Every business owner wants a successful future, and it’s often found at the exit.
Walking the tightrope of a sale
Succession can be tricky, and it’s a long road between deciding when to step away and closing the deal. It all begins with readiness.
The first thing to ask might be, Is the owner ready?
Since this isn’t a “yes” or “no” answer, this helps bring it into focus:
- What will the business transition look like from ownership and leadership perspectives?
- Is the owner tied to the business personally and/or financially? Someone’s identity and/or existing financial dependence are big exit strategy factors.
- What comes after the exit? Whether it’s starting another business or retirement, the right future mindset is everything.
It’s then time to evaluate transition options, with three common directions:
- Passing it onto the next generation: Even if family members want to take over, are they ready? Since ownership and leadership are different, you can get creative by giving ownership to the next generation and having an outsider run it.
- Sell to an outsider: This can be an individual, a private equity firm, or a strategic buyer.
- Adopt an Employee Stock Ownership Plan (ESOP): As an exit option that will yield full market value, many companies choose to share the benefits of ownership with their employees.
Next big question: Is the business ready?
This answer begins with valuation that separates expectation from reality. Since owners have put their blood, sweat, and equity into a business, they often anticipate a high valuation — but that’s not always the case. An upfront valuation is essential for providing a real potential value to an outside buyer and ensuring it meets the owners’ financial needs and expectations.
Attracting the right buyer
Here’s a shortlist of things investors look for in deciding whether to buy a business:
- The industry of the business, including where it is now, and where it’s projected to go
- Current market rates
- Upward trajectory in terms of revenues and EBITDA (earnings before interest, taxes, depreciation, and amortization) as a measure of a company's overall financial performance
- Strength of management/leadership team to facilitate a seamless transition
The best time to sell is when the company is growing, the bottom line is growing and there is consistent growth and attractive prospects for the future.
Making the sale
The sale happens in the sweet spot where the owner is ready, and the market is right. In its most abbreviated form, here’s what to expect in the sale process:
- First, decide if you want to work with a broker (they receive 5-10% of the business selling price)
- Understand who the strategic buyers might be and make a prospect list
- Head to auction (it’s about getting the highest price)
- Put together your book that includes everything about your business
- After receiving signed nondisclosure agreements from potential buyers, send all prospects the book
- Interested prospective buyers will send letters of intent (LOI)
- Once the deal closes, you’ll go under contract and enter the due diligence period
Closing the deal
This due diligence “home stretch” is intense. The (tentative) new buyer wants to ensure that this is a smart purchase, and the seller needs to prove it is. In addition to answering extensive questions about the business, owners must move the business forward during this time.
Since the buyer can walk away before the sale is finalized, existing owners need to keep the business running at peak levels. This often means bringing in outside help to get to the signed dotted line.
Making your own move
Today’s business world is making lots of changes, and you need to make your succession strategy a priority. Moving through the exit may be the only way you move forward. Are you ready?
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