by Dan Fales & Tony Schweier, Shareholders, Clark Schaefer Hackett
Succession planning probably isn’t high on your priority list. After all, you likely have lots of things to think about besides the day someone else will be running your company.
It’s critical to think about the long-term future of your business — including after you have handed the leadership reins over to someone else. The beginning of a new year is an especially good time to focus on succession planning. Here are a few questions to ask as you devise a succession plan for your business.
What are you going to do after you sell your business? Maybe you plan to retire. If so, you should work with a professional wealth advisor to develop a detailed financial plan to ensure you have sufficient resources to support your desired retirement lifestyle.
Maybe you want to start another company after you sell your existing business. In this case, you’ll want to make sure that the proceeds from the sale of your business are sufficient for launching your new venture.
Business buyers usually fall into one of two broad categories: internal buyers or external buyers. An internal buyer may be your existing employees or management team, in which case the business sale could be conducted via an employee stock ownership plan (ESOP) or management buyout (MBO). Or it could be family members if yours is a family-run business.
There are two main types of external buyers: financial buyers and strategic buyers. Financial buyers, such as private equity groups, look for companies with high growth potential that they can later sell at a profit to reap a return on their investment. Strategic buyers, meanwhile, seek businesses whose products or services complement their own, such as a competitor. This kind of merger can help the buyer gain market share by acquiring your customer base and consolidating operations.
The best way to boost the eventual sale price of your business is to focus on key business value drivers today. These are things you can do now to make your business more valuable to buyers and reduce potential risks.
For example, are your corporate records, contracts, and other legal documents current and in good standing? Are your financial statements accurate and current and is your technology up to date? Have you developed a seasoned and experienced management team that’s prepared (and financially incented) to help ensure a smooth transition to new ownership? And, perhaps most importantly, is there a realistic business growth plan that will enable buyers to realize positive ROI on their investment?
This is the proverbial $64,000 question. Many owners think they have a good idea of what their business is worth based on instinct or hearsay from their peers. But this value often isn’t realistic. Most owners have an emotional connection to their business and tend to over-value the “sweat equity” they’ve put into building it.
Buyers will look at your business from a purely numbers and analytical approach. The main thing they’re looking at is the quality of business earnings and how repeatable these earnings are in the future. Therefore, makes sense to engage a valuation professional to conduct a quality of earnings study to estimate the future cash flow potential of the business and come up with a rough business valuation.
Selling a business is a lengthy and complex process that requires high-level expertise. You should begin forming a business advisory team that includes an investment banking firm to market your business, a valuation professional to help you gauge business value and determine the selling price, an experienced M&A attorney, and a tax advisor who specializes in the sale of closely held businesses.
Even if you’re not planning to sell your business anytime soon, it’s still smart to begin the business succession planning process now. This way, you’ll be ahead of the game when you’re ready to exit the business.
Dan Fales and Tony Schweier are shareholders at Clark Schaefer Hackett, a local business advisory firm.
Clark Schaefer Hackett is a Goering Center corporate partner, and the Goering Center is sharing this content as part of its monthly newsletter, which features corporate partner articles.
About the Goering Center for Family & Private Business
Established in 1989, the Goering Center serves more than 400 member companies, making it North America’s largest university-based educational non-profit center for family and private businesses. The Center’s mission is to nurture and educate family and private businesses to drive a vibrant economy. Affiliation with the Carl H. Lindner College of Business at the University of Cincinnati provides access to a vast resource of business programing and expertise. Goering Center members receive real-world insights that enlighten, strengthen and prolong family and private business success. For more information on the Center, participation and membership visit goering.uc.edu.
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