Succession planning is a component of a long-term business strategy that requires careful consideration and strategic execution.
In the United States, only 2 out of 10 businesses that are put on the market actually sell. Further, the average business owner has between 80-95% of their net worth in their business – a frozen asset. While these two facts exist, The Exit Planning Institute’s National State of Owner Readiness Survey indicates that 99% of owners agreed with this statement: “Having a transition strategy is important both for my future and for the future of my business.” However, 79% of the same respondents indicated they had no written transition plan, and 49% indicated having done no planning at all.
If you are a business owner in one of these groups, you can begin taking proactive steps now to ensure you are positioned for a successful exit while securing the longevity and prosperity of the enterprise you’ve worked so hard to build. The journey begins with a well-thought-out plan and a commitment to nurturing the future success of the business many years in advance.
- Define clear objectives and timelines. When might you want to retire? What financial goals do you aim to achieve? What legacy do you want to leave behind? These goals set the stage for creating a strategic roadmap. An exit planning advisor and financial advisor are key roles to engage to build a holistic strategy to encompass planning for personal and business goals.
- Build a strong management team. A capable management team not only drives the success of the business, but it also enables a business owner to transition without risking future success.
- Understand your market valuation. There are many variables that impact valuation – some of which take years to impact. Understanding the key drivers to improving (and hurting) the value of your business through the lens of an investor or buyer will ensure you receive maximum valuation when you transition ownership.
- Implement and document key operational procedures, protect intellectual property, ensure you have an employee handbook, etc. This will streamline your day-to-day operations and ensure critical knowledge and systems can be maintained and trusted through a transition in ownership/management.
- Diversify revenue streams and your client base. Reducing dependency on any single revenue stream or a handful of clients will improve the overall stability of the business and attractiveness to prospective buyers. This also reduces risk associated with market changes.
- Explore the many options to transition ownership internally and/or to a third party. An exit planning advisor can advise on the pros and cons of each.
- Implement employee incentive programs to contribute significantly to the value of the business. Compensation specialists can be enlisted to advise on models best suited for long-term success.
- Build your team of experts. Succession planning is a “team sport” and will involve a variety of subject matter experts at various points along the way. This team may include an exit planning advisor, a value growth advisor, a financial advisor, CPA, estate planning attorney, tax advisor, M&A advisor or business broker, ESOP specialist, and others depending on your chosen strategy.
Aside from the data shared above, we know more than 50% of businesses close due to one of the “5 D’s”: death, disability, divorce, disagreement, and distress. These statistics can be improved by education and planning. Taking action now will ensure your business will be ready when you are to move onto your next act. Waiting another day provides no benefit.
Lesley Vossenkemper is the founder of Scale-Up Strategies in Cedar Rapids. She is a Certified Exit Planning Advisor (CEPA).
