Understand the Business Succession Planning Process

Planning for the future is an essential part of sustainable business growth. As the owner of a small business, envisioning your eventual exit from the company may seem distant or even daunting, but the key to securing long-term success lies in strategic business succession planning. Developing a well thought out exit strategy for your business not only safeguards the legacy you’ve built but also:

• Paves the way for a smooth transition of leadership
• Ensures the continued prosperity of your enterprise
• Opens doors to new opportunities.

When it comes to planning your exit strategy, you need to create a business succession process that outlines the steps and resources you need to be successful. Look at succession planning from both the personal and the business perspectives because the two are sometimes inextricably linked, especially when it comes to smaller-sized business.

Explore the importance of business succession planning and the strategies you need to help you navigate this critical phase of your entrepreneurial journey.

Fail to Plan, Plan to Fail

According to the U.S. Bureau of the Census, 90 percent of U.S. businesses are family owned and employ 50 percent of the workforce. In addition, small companies fuel roughly 44 percent of the country’s gross domestic product. Then why do only 30 percent of such companies succeed in the second generation and just 15 percent make it to the third?

That is because most small business owners fail to seriously plan a viable business succession strategy. Even if you have no plans to retire, business succession planning is needed in the event something happens to you – death, serious illness or disability.

Understanding the Personal Side of the Equation

When you started your business, what was your primary intention? Most likely you did not start your business with the intention of maximizing the value at some future date.

In reality, you started your business to earn an income to raise a family, support children, provide retirement for yourself and perhaps provide support to charitable endeavors. For most, starting a business is simply a mechanism that can generate money for you to build your personal life – nothing more nothing less.

Goal of succession planning is to determine how much you will need to net from the sale of the business to maintain your lifestyle and reach your long term objectives.

Knowing this helps with the timing and advisability of the sale.

Downside of Not Planning for Business Succession

Over the past 20 years, I have worked with many small business owners who make terrible mistakes when it comes to planning an exit strategy. There can be a number of reasons and a few myths that feed into this issue. But the primary reason is that they rarely look at the business as an asset. And seldom do they ever consider developing an exit strategy for their business.

When small business owners start their companies, their initial intent is to make a paycheck to support themselves and their families. Many business owners rarely think about their business as a salable asset until something happens, such as:

• Owner burn out
• Health-related issues

Sadly, either of these two events usually puts the owner at a disadvantage – the proverbial fire sale. It generally takes years to put a business succession plan in place that will maximize the value of your business.

If I use the analogy of selling a used car that you no longer want, it will drive the point home (no pun intended). If you have a used car and you take the time to clean it, tune it up and make it look good before you try to sell it, odds are you are going to get more money on the sale. With a business it is more complicated but analogous to this example nonetheless.

When Should I Consider Selling My Business?

Determining when to sell your business is difficult. There are a number of considerations that need to be made both on the business and personal side.

One aspect of your business succession plan is to determine whether the sale will net you enough money to live your preferred standard of living over the course of your lifetime. This is assuming you are selling the business for retirement. Here it is important to make sure you understand the effects of taxes on the sale.

Many business owners run retirement planning numbers and assume they are going to net a few million dollars. Unfortunately, many realize they grossly underestimated the impact of state and federal taxes.

Also very common are situations where a business owner underestimated the value of the business. Knowing this might have allowed them to retire a few years earlier. They could have sold a few years earlier and sailed off into retirement.

You also need to build into the numbers the cost of selling the business. These costs include a business broker, real estate broker as well as other types of consultants.

This illustrates why it is important to have your finger on the pulse of the value of your business and to give serious consideration to succession planning and not just a periodic passing thought.

How to Determine Your Financial Requirements

There is a lot that goes into answering this question and most business owners don’t consider the magnitude. Some of the things we look at include:

• Forecasting personal expenses
• Integrating family goals such as education or a second home
• Integrating social security
• Helping aging parents
• Building wealth to transfer to children or grandchildren
• Creating an estate plan
• Accounting for taxes
• Addressing insurance needs

We also consider more complex situations such as:

• How do you equate your estate if one child is in your business and the others are not?
• How much are you going to need to invest in the business to make it grow?
• What risk to your personal life could the investment make if it were to fail? Can you absorb the loss?

What about the mental or social aspects such as:

• What will you do with yourself at retirement? Many business owners suffer seller’s remorse or go into depression when they sell their business and retire. We get our satisfaction in life from our business. We have a certain social standing as business owners. When that goes away, so does our sense of self-worth if we are not prepared.
• Will your retirement affect your marriage? When one spouse is working constantly and is suddenly home all the time, it disrupts a balance that has existed most likely for decades.

Succession planning is complex. Some small business owners need the proceeds from the sale to retire comfortably. Others may not be in that situation and simply want to exit the business while leaving it in good hands. But in either case, understanding what decisions you need to make need to be considered years in advance of putting your business up for sale.

Form a Team of Advisors

To begin the succession planning process, we determine how much money you need net of taxes from the sale of your business. This is the starting point for determining what you need to do for the business to achieve that number.

Then we figure out the current value of the business to see how much you will need to invest to grow over the years to make it worth what you need.

This is where you need to bring in the team of consultants. You can’t do this alone. You need advisors to assist in and provide guidance in the process. Depending on the size of your business and other factors, at a minimum, you will need a:

• Comprehensive financial planner who understands both business and personal finances as the two are inextricably linked for small business owners
• Business attorney
• Valuation expert
• CFO
• Business broker
• Risk management specialists
• CPA.

There could be the need for others such as a:

• Business consultant
• Marketing professional
• Real estate specialist
• Mergers and acquisition specialist
• Venture capitalist
• Financing specialist
• HR consultant

You might also need a behavioral specialist if you plan on an internal transfer to family members and they don’t play well together in the sand box. As you can see, the situation can be complicated and perhaps for some mind boggling. However the payoff can be and usually is dramatic.

As a comprehensive financial planner, I can help you put valuable employee benefits into place to attract and retain employees. We can create and manage benefits such as 401(k) and other types of retirement and savings plans for your employees. We can also help you with varying insurance programs that may be necessary such as  key man insurance and insurances that are part of a buy-sell agreement.

Succession Planning is Not a Turnkey Solution

Like many strategic plans, you can’t just set it and forget it. Once you have your exit strategy in place, set milestones you need to hit in order to successfully grow your business. That strategy needs to guide your activities for years so that you and your business is ready when the time comes. Review your plan annually with your team of advisors to ensure you are still heading in the right direction.

Even if you don’t plan to leave your business, unplanned exits happen. Having a succession plan ensures that the business operates smoothly and clients are serviced throughout the transition.

If you would like to know more about Mosaic Business Advisors business succession planning services and process, contact us to set up an initial consultation.