Why Every Business Owner Needs a Succession Plan
Everything you’ve invested and worked so hard to achieve in your business could come crashing down if you haven’t also taken the time to plan your exit strategy. Some of the biggest mistakes and losses that happen, come from not having a plan which includes a date to sell or retire, trouble finding a buyer, and transition strategies that have disastrous results. While no one wants to talk about it, having a solid succession plan can help. Every business needs to have a succession plan.
Here are some key questions you need to ask yourself & your partners– Questions like:
· what is my business really worth and is it ready to sell?
· what outcome am I looking for?
· do I have an exit strategy and a date? and
· who do I need to talk to?
This video, Every Business Needs a Succession Plan is part of a video series to help employers like you minimize your risks and maximize your profits.
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For those who have a Succession Plan, the transition often goes smoothly, and they take the time to accomplish the results that they want. The ones who do not have a Succession Plan is often more complicated and costly.
Often clients come to us who either do not know what their business is worth or their expectations are unrealistic. When preparing your succession plan, it's important to look long term. You should be meeting with your accountant and your business valuator three to five years before you're actually ready to sell. The accountant will make sure that the tax Structure is appropriate and you can maximize for the capital gains exemption, and the business valuator can help you determine what you need to do to increase the value in the next three to five years.
The lawyer's role is to help you through all of the legal paperwork. They'll help you with the letters of intent, the non-disclosure agreements, and the all-important purchase document. They'll make sure that all your interests are protected. A business can be valued based on either the assets it owns or based on the earnings it's gonna generate. When valuing the business, we often look at the historic results to try to forecast what the income is gonna generate going forward.
We'll often also adjust for the management remunerations. How much would an investor have to pay you for the work that you're doing? Because often the amount that you're collecting is not really fair market value. The value is often determined based on the income that it's gonna generate going forward. We often look at historical numbers to determine what the future will bring.
We'll adjust for nonrecurring expenses or income, adjust for non-business related expenses, and also for the management remuneration. The remuneration often paid to the owners are not necessarily equal to fair market value, so we have to adjust for that. After we determine the earnings, we'll determine the capitalization rate required to determine the value of the company. You've often referred to the capitalization rate as the multiple, so earnings times a multiple. The multiple is really a reflection of the capitalization rate. The higher the risk of the company, the higher the capitalization rate required, and therefore, the lower the multiple used to determine the value.
The capitalization rate is equal to risk. The risk can be the general economic conditions at that time. The risk associated with that business or that type of industry. The risk associated with the owner. Is the owner too involved in the business and can't transfer anything to the new owner? What kind of clients does the business have? Do they have one client or many clients? Or do they have more than one supplier, or do they rely on that one supplier? All these come into effect for that capitalization rate. Again, the higher the risk, the higher the capitalization rate, the lower the multiple. Once you've determined the value, then it's getting the business ready to sell. Can you increase that value? You may wanna look at your income and your expenses to determine if there's anything you can do to influence the value. The more clients that you have, the greater the value of the business. Therefore, get your business ready to sell.
Look at the expenses. Are there any frivolous expenses that you do not need to operate the business? This, again, will increase the bottom line and increase the value. So you'll wanna make sure your company qualifies for the capital gains exemption. This requires you looking at the balance sheet to make sure that you don't have too much non-active assets to qualify for that capital gains exemption. This will make your disposition most tax efficient.
Once the business is sold, you no longer have control over the operations of the company. For some owners, this is hard to accept. Realizing this will often influence the person you want to sell to. What are you looking for? Are you looking for family security? Growth for the next generation? Do you just wanna liquidate the company, or do you wanna see it continue and grow? Do you wanna see it stay in the community that you're currently in? Often, the outcome will influence the strategy. We often have business owners who wanna transition to the next generation, but sometimes that's not the best solution. Are they the correct individuals to buy the business? Do they have the skillset? Do they need to be groomed? If there's more than one individual, will they get along? Often we see conflicts between siblings which basically harm the growth of the business. You also need to look for other individuals who may be interested in buying the business. Key employees. Do they have the skillset? Are they interested and do they have the money? Will they be able to transition from employee to employer? Often the mindset is different. Do you have any suppliers, clients, or even competitors who are interested in buying the business? All of these need to be looked at, and your advisor can help you make that list of potential buyers. It's important not to rule anybody out. Having a plan will also help you in case of an emergency. Spouse and family members will know what that plan is because you have communicated with them. Because you have communicated with them, it should decrease any disputes amongst the family members because they will know what that succession plan is. You'll have key individuals in place who can do the work that you are doing and will be able to keep the business going.
No one ever thinks of emergencies when they're doing the succession plan, but that is always a possibility, and having a good succession plan will help in those emergencies. There is definitely always a risk when trying to transition your business of other individuals finding out about it. You do risk the loss of clients or even staff going either to competitors or just finding work elsewhere. A proper transition plan will help minimize that risk. The transition plan is usually done over a longer period of time, so therefore clients or staff don't know when you're gonna be transitioning out of the business.
You're just planning for the long term to basically make sure the transition is successful. That being said, we have had instances where clients have managed to sell their business and no one in the company was even aware that the process was happening.
Your business is often the most valuable asset you have. Do not try to sell it yourself. You need to talk to an accountant, a lawyer, or a business valuator. They'll help you navigate through the process and make sure you end up with the result that you're looking for.
DOWNLOAD Succession Planning Strategy Guide: https://eepurl.com/gpI0cv
Please share with friends who need to watch this quick video. It could make them $$$$$$ more money.