Business Article: Successful succession

What are Your Aims?

If you currently focus on performance and profit as your achievement aims, you may be better served by also paying attention to value and transferability.

If you want to sell your business for a good price, it makes sense to ensure that it will be a desirable purchase based on the reliability of returns and the ease of someone else being able to take over without a hitch in operations. The reality is that it is becoming all the more important to work on creating a business that works on autopilot whilst continuously improving results.

There are generally three ways business owners achieve business succession:

Sell the business to an outside purchaser
Pass the business on to someone from the next generation in the family
Sell the business to existing employees

One other option that can occur, although it is not a viable succession option, is to simply close down the business and walk away. This option may be the only choice for many business owners who are unprepared for the future environment when it comes time to retire.

The appropriate decision should be to start to prepare for business succession now, so that when the time comes, you have a number of alternatives to choose from, rather than being stuck with a suboptimal choice because of a lack of planning.

How to Get Maximum Value When You Sell

When you look at it, selling a business is just like selling most other things, but perhaps the most common sales transaction we can relate a business sales process to is that of selling a house.

Many businesses have a lot in common with real estate when it comes to selling. Some businesses, such as corner dairies, retail stores, or some service businesses are frequently on the market and their is a simple valuation process. Often what you get is some multiple of earnings or sales, depending on the situation, because this is what the market is prepared to pay.

However, what is the situation for the types of business that do not have a frequent turnover history and known market valuation? The market for purchasers of these businesses is not so large and it is often difficult to attract a buyer if your business is relatively unique, or relies heavily on your experience and involvement.

The answer for both types of business however, is the same when it comes to maximising the value you receive when you sell. It is the same as in the real estate market. You get maximum price when you make your house (or business) an attractive proposition to buy.

What happens in fire-sale situations or mortgagee sales? The pressure is on the seller and buyers can get a bargain, as these properties are virtually dumped on the market and the sellers are in a desperate situation and need to sell for whatever they can get. This is not the situation you want to be in when it comes to selling your business. Unfortunately however, many business owners in the future may be faced with similar circumstances because the market pressure will be against them with a scarcity of buyers and pressure to sell.

The secret to Getting Maximum Value is Preparation.

To get the best price when you sell, you need to be prepared to sell when your business is in optimum condition and is an attractive purchase proposition.

You can either take a chance that when it comes time to sell, your business will just happen to be in the optimal state to be attractive to an investor. Or, you can proactively work towards developing your business into that optimal situation in a predetermined time frame. Which do think is likely to achieve better results?

The first thing you need to do is set a date for when you intend to exit the business. Many people struggle to do this, because it is difficult to anticipate how you may feel about running your business in five or ten years. However, setting a date gives you a definite time frame to plan towards and makes it more likely that your goal is achieved.

You never know what might happen in five year's time, but if you are ready to sell with your business running at optimal performance, you may find that means that you don't have to commit so much time to running it and its financial performance would also mean that it could probably support you for some time without actually having to sell it. This is a great position to be in when it comes to selling, as you have all the power, with an attractive proposition and no pressure to sell.

What can tend to happen for many people who have been in business for a while and start to think about selling is that they get tired and lose a bit of interest and motivation towards the business. Thoughts about getting out lead to choices which are less than optimal for the ongoing performance of the business.

For example, important plant and equipment may not be upgraded because it can get you by for a few more years. However, the result of this type of thinking is that the business gets to be tired and run down as well as the owner. What are the chances of maximising your sale price if your business is run down and tired looking, with old, almost obsolete equipment. This is short term thinking which usually leads to a fire-sale type exit rather than an optimal high value exchange.

Having a planned exit date and a development plan to optimise your business for sale is a motivational element in itself. Rather than being jaded by business as usual, you have an action plan which gives you targets to work towards and the sense of achievement which boosts your motivation.

This in itself probably helps everyone else in your business to be more motivated to perform and inspired to high performance. How different to the feeling of, "If the boss doesn't care, why should I?"

Target Your Market

Just as in selling your products or services, when you plan your exit strategy you have the opportunity to think about who would be likely to buy your business. Then you can plan your optimisation towards the specific needs of your target market for your business. For some businesses there will be a multitude of potential buyers, but for others there will be few. It depends on your situation. For some, the most likely buyer may be your main competitor.

A proper assessment of your market prospects will help identify who and how large your potential market may be. This assessment and identification can then help shape your planning and your development towards making your business attractive to the potential buyers. Some businesses may be attractive to a cashed up investor who wants to buy into a profitable enterprise that runs with minimal input from management.

For others, your main competitor may be the best option. It may be just the ability to add your products to their range that may be attractive and they may have no need for your facilities or staff. Your exit plan will be very different for either of these options. Therefore, identifying your target market can greatly affect your options in planning your optimal exit.

In House Transition

What about if you already know who you want to take over from you when you go? Perhaps you have a son or daughter earmarked to be your successor.

This situation seems easier than having to find a buyer, but it too is fraught with danger if not handled well. One of the greatest dangers to this transition is the potential for differing ambitions between the incumbent manager and the successor. Often the incumbent wants to keep the business on a steady course as he or she winds down to retirement, while the successor sees major opportunities that require investment and increased activity.

If this situation is not well managed, it too can lead to suboptimal results for the business and for each of the players in the transition process. Again, the transition needs to be carefully planned taking into account the needs of all parties, the exiting owner, the successor and the employees in the ongoing business.

The positive side to this equation is that the succession process can happen in a smooth transition with the successor and the exiting owner working together to develop and train the successor over a reasonably lengthy time to ensure that the new manager does not find the take over akin to being thrown in the "deep end" to sink or swim. A planned exit can enable this transition process in the best possible manner.

Conclusion

One thing is certain. One day you will no longer be running your business. You have the opportunity to prepare for your exit and the ability to "go out in style," or you can part company with your business in a number of less preferred ways. Rather than sit back and not think about that inevitable day, or just wait and take your chances, why not decide how you want it to happen and then set about making it happen the way you want? The choice is yours, but the sooner you start to get proactive about this process, the more options you will discover you have.

By Greg Roworth