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As a business owner the weight of your business is usually entirely on your shoulders. So how do you make sure that all your hard work doesn’t disappear the minute you turn your back in it – whatever the reason?
The key to a long-lasting successful business is strong leadership, a clear succession plan and the positive cash flows required to thrive and grow. The problem is too many SME businesses have the leadership concentrated in the ownership, who also have any strategic plans locked in their heads.
The value in your business is in the ease with which you can hand over the reins and let the next generation or your management team take over BEFORE you reach retirement age. Having a well thought out exit strategy and structured succession plan before you retire has multiple benefits. A business that has clear and executable strategic goals, shows the pathway to develop staff and grow profits is always worth more than one that doesn’t. Additionally, it means you’re ready for the unplanned, even tragic events that often come at you when you least expect them.
So, what do you need to think about for your succession plans? Three common ways to transfer ownership of a business are:
- Passing on to family members
- Getting your management team to buy you
- Sell to a third party
There are many other methods of exit, but these are the 3 most common. None are exactly straight forward and not having a plan means that if something unexpected were to happen to you, you might be leaving a mess behind that could result in your business value being significantly and negatively impacted.
Passing to a family member
Whilst this might sound easy, it is fraught with challenges. The issues of ownership and often not clearly separated from day-to-day control of the business. Determining who will run the business might be a very different from who has ownership of the shares. Lots of factors around decision making, dividends, future sale processes etc need to be ironed out. Leaving this to the last minute allows the boundaries of business and personal relationships to blur. Communicating clarity is king here, and as early as possible.
Another challenge with passing to family members is often the financial security of the business owner is tied to the business. Passing control to the next generation where there is no exchange of shares / ownership often cripples the business with the burden of paying the “owner” with a salary in lieu of pension payments that would be expected to come from sales proceeds. Finding a mechanism to fund the transfer of ownership, leaving the next generation in control of its financial and operational destiny is one the challenges for many family businesses. Fortunately, financial brokers have access to more sophisticated funding instruments that can help in these cases. Cash flow positive businesses make it easier to source funding at affordable and flexible terms.
A Management Buy-Out (MBO)
When your business works well without you in the day to day because you’ve invested in the RIGHT people doing the RIGHT things at the RIGHT time and for the RIGHT reason, your business is worth more. This also means that an MBO is an option for you when you retire or if something unexpected happens to you.
One of the clear advantages of a management buy-out (“MBO”) is that post-sale disruption to the company is minimised. The management team stays with the business and none of the stakeholder really notice a difference in the day-to-day operations. Business owners who invest in talent at this level show buyers (MBO’s are usually backed by organisations with funds to invest) that the value in their business is not tied to them. This is Exit Readiness 101. Reducing owner reliance is a big factor in the value of a business.
Leveraged buyouts are where a “lender” funds the acquisition of a business by the management team, who are already running the business at a strategic level.
Third Party Sale
So many business owner have their retirement funding tied up in their business and require the release of funds to enable them to stop working. Selling a business is not easy or quick, if you want to get the best value from it. There is no such thing as a simple sale – there are less painful sale processes where there has been some planning.
Key to a successful sale is to find a buyer who has the right combination of skills, experience and commitment. This takes time and research. And help from experienced advisors. It also takes planning for succession within your management team. Getting clear on your current business value and the strengths and weaknesses in your business is a good 1st step. After all a buyer is going to find them out, it’s better that you already know what a buyer is going to find.
Identify all the critical business functions and plan to improve them before going into the sale process. Communicate your plans to everyone involved so they know what is going to happen, when and what’s in it for them. Don’t forget the costs, such as advisor and legal fees, completion fees etc.
Conclusion
When you plan for succession at every level in your business, it adds value and makes it easier to execute your exit plan, even if it must be triggered unexpectedly. The three most important ingredients are a strong leadership team, a clear strategic plan for the business and evidence of positive controllable cash flows.
Are you ready to sell? Click here to contact Christine by email alternatively you can book a call with the Business Mentor of the Year 2020, author and speaker. Helping business owners get their businesses exit ready so they can enjoy a happier, richer future. Christine saves them THOUSANDS and increases the value of their businesses by MILLIONS.