5 Key Questions for a Successful Succession Plan
Think you or a client may sell within the next few years?
Here are key questions to answer at the start of the succession planning process:
1. Why are you selling?
This is the most important question. Leaving your baby to someone else's care and going through the stress of a transaction are not easy to stomach. The process becomes much more palatable when you know why you are going through the pain of succession. Your “why” will keep you grounded when things get tough.
"Leaving your baby to someone else's care and going through the stress of a transaction are not easy to stomach. The process becomes much more palatable when you know why you are going through the pain of succession."
2. When will you exit?
It takes at least a year to sell a business on the open market. It can take even longer to increase the value of your company by improving customer concentration, the leadership team, processes, financial record keeping, and increasing EBITDA. Identify a realistic exit date and work backwards given the work needed prior to offering your business for sale.
3. How much EBITDA do you need to hit your cash goal?
Buyers of your business (internal or external) will value your company by a multiple applied to adjusted EBITDA. In professional services, sometimes value is based on a percentage of gross sales or gross profit. In an EBITDA valuation, if you know that the average valuation multiple for your industry is 2x, it is easy to work backwards to compute how much you will need to grow your company to hit your goals. For example, let's say that your EBITDA is $500,000 now and you want to retire in 5 years with $2 million. If the prevailing EBITDA multiple for your industry is 2x, this means you need to grow the company to $1 million in EBITDA in order to hit your goals at exit.
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4. How much cash will you need?
Speaking of hitting your cash goals, do not forget about debt repayment, broker fees, and taxes. Start computing these expenses at the beginning of your succession planning process. A week before closing, many business owners start freaking out about their net proceeds after taxes and debt repayment. Although the value of your company is not based on your net proceeds goals, owners should know how much cash they need to walk away from the closing table with. See your wealth manager as soon as you start planning for an exit.
"Start computing expenses at the beginning of your succession planning process. A week before closing, many business owners start freaking out about their net proceeds after taxes and debt repayment."
5. Who will take over the business?
The most attractive businesses have a general manager or leadership team in place who can continue to run the company in the owner’s absence. Identify, hire and/or train that person now so they are ready to take over the business when the time comes.
Jamar Cobb-Dennard is a business broker and M&A attorney. To learn more about buying and selling a business, listen to Jamar's podcast, What's it Worth.
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6 个月Great points! Another question might be, 'Who actually wants to take over?' Sometimes, we assume successors without asking. Could save a lot of headaches, Jamar Cobb-Dennard.
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6 个月This has been a hot topic of conversation in many industries...from conversations I've had with owners who have sold or the management team who is there after the deal is signed, I think a critical conversation should be had around culture/identity of the business. Many times the owner is the face or brand of the company. Determining what their role means in the future short and long-term is critical. If you have an established mission, vision or values make sure to incorporate that into the employee life cycle- educating new employees on those pieces, helping them understand how they contribute--I did this in new employee orientation virtually and in-person. Then for the existing employees- having an established recognition or awards program is helpful. And for those on the leadership team-->they had better be aligned with the values of the organization because culture is created at the local level so helping those leaders at every level understand how to build and sustain culture is key. Who are your culture champions? Identify them and start up a focused committee that meets regularly to strategize. I've also seen those be the voices on social platforms internally and externally to build that community and culture organically.