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What's happens to your business when you don't work it any more?
Make the right exit choices
If the business of succession is not done by process (through planning), it will be done by crisis ie a failure to plan.
When a small business is a key component of family wealth, the owner usually has a strong desire to “hand it over” it in one form or another.
But perpetuating the business through an orderly succession to family members or other insiders is the ultimate management challenge. The owner(s) must deal with business, family, tax, and estate issues when planning for the succession of both management and ownership.
Any transition must preserve the continuity of leadership and it is most important that the succession of ownership and management be perceived as a process rather than an event.
Succession is a process requiring planning, teamwork, and constant re-evaluation.
Planning for succession in a family business is a special situation of the first order.
So infrequently is it done successfully that barely 30 percent of family businesses survive into the second generation and fewer than 15 percent of them endure into the third.
A typical succession plan has two elements, which should be considered separately:
the transfer of power , whereby control over the business's operation is transferred to
those best suited to exercising it;
the transfer of assets whereby the wealth concentrated in the business is transferred to designated family members, who may be a different or larger group than the person or persons who will be assuming power.
The former is an art, the latter a science.
The family business environment is, of course, impacted by all the issues faced by any type of business. Technology, laws, climate, competitors, economic trends, and unrelated (non-family) employees are among these influences.
In addition, the family business environment is influenced by anything that influences the family itself, such as the relative health of its members, their various interests and skill levels, their individual marital status, and the level of business participation of each individual.
Managing a transfer of power while balancing the internal and external environmental influences of the business is a juggling act at best.
Fortunately in this enlightened day and age, most family business people are professionals who manage their companies to compete effectively in our global marketplace. They don't have time to dwell on petty jealousies and family squabbles.
The major issues confronting a family business owner seeking to transfer power to successors are:
· selecting a successor
· intergenerational confilct
· different agendas
· first generation goals
· second generation goals
· training
· transition timing
For many entrepreneurs, the term "succession planning" may immediately evoke the idea of passing the torch on to a family member.
However, in reality, succession planning is about finding the right exit strategy when you're ready to hand your business over to somebody else.
One of the most important steps will be identifying all the options available to you for exiting.
When you choose how you want to exit, it's important that you feel active and engaged in the process.
But at the same time, you have to accept that you're letting go of your business.
Many business owners may be nervous about retirement and imagine "eternal golf or fishing.
But ultimately, entrepreneurs should look for an exit strategy that gives them a sense of being worthwhile and fits their personal and business objectives. Here are some of the most common exit strategies used today.
Family transfer
If transferring your business to a family member is an appropriate strategy, it's key to ensure that your family is fully aware that you're planning a succession and to give them clear time parameters. A part of this is ensuring that family members get a chance to voice their concerns and interest in the business.
One of the most obvious advantages of opting for a family transfer, as an exit strategy, is that your family will benefit from your business legacy. As well, family members who are already involved in your business may require less coaching or involvement.
Management buy-out (MBO)
The purchase of a company by its management team is another possible exit strategy for succession planning.
There are several advantages:
An MBO can ensure uninterrupted continuity when you hand over your business.
Your new management team has invaluable experience.
Your company is more likely to keep its existing clients and business partners.
Selling to outside interests
Selling a business to outside interests is the most popular exit strategy because it's typically "more definitive and involves fewer variables than a family succession.
Since you're transferring responsibility to someone else, it's imperative you get a strong indication of confidence from the buyer.
Business owners should also be aware that the price they receive for their company might be more or less than the appraised market value. While many business owners tend to overestimate the pricing of their businesses, a surprising number may underestimate it.
For example, if your company becomes part of a much larger venture then the value may go up accordingly.
A large corporation that is buying your business, for instance, may be able to do more than you have with your business and willing to pay a higher price. It's very important here to be vigilant about understanding the value of your business and how it may be influenced positively or negatively.
Getting the full value for your business
Whether you're passing the company to a family member or selling it to outside interests, keep in mind that you will need a business valuation that establishes a realistic and fair dollar number on your business.
Putting that dollar value on a business takes time and you need to have a specialist who can look at your assets, liabilities and goodwill with an objective viewpoint.
There have been too many cases of business owners who got caught at the last minute and weren't able to get the full value that they had envisioned.
Small business owners who choose selling as an exit strategy, should also be aware that buyers are increasingly more sophisticated and demonstrate more business savvy.
Smart buyers will certainly delve more into your business history. So in turn, you have to anticipate this and be sure that you're armed with the right figures and backup material to get the value that you're looking for. You don't want to find yourself in a vulnerable position.
Company owners should also keep in mind that the value of a business is not just based on financial statements.
The number of customers you have, for example, could also be a determining factor.
Planning ahead
Planning ahead, at least 18 months to 2 years, helps make better business decisions.
The earlier you start, the more time you can take an objective look at your company and where it will be down the road.
Succession planning takes time. Ensure that you have given yourself adequate time to consider the personal, emotional and financial issues such as business valuations, tax implications, family matters, and coaching successors.
And that's precisely where Standard Edge can come in.
We recommend that business owners rely on external help to appraise your business, evaluate your personal needs and draft a succession plan.
Objectivity is one very important issue here. You want to be advised by somebody with no conflict of interest.
