Are you ready to pass the baton on with your business? Do you know what is needed for an effective succession plan? Succession planning can be one of those business topics that business owners can avoid or put in the too hard basket for too long. At DFK Everalls, we work with business owners to guide you through the succession planning process or give you that nudge you need to get started. We’ve put together three key factors in this article to ensure effective succession planning.
So what is Succession planning?
Succession refers to the transfer of the ownership and/or management of a business.
Ownership succession focuses on who will own the business, when and how that will happen.
Management succession focuses on who will run the business, what changes will occur and when the new manager will be accountable for results.
Either way, your plan needs to address the following:
- How the way you do business is changing and the events you need to control
- How realising your optimum business value will become more difficult with many businesses for sale and less qualified, willing buyers
- How to realise future business value by ensuring a future buyer
There are three key factors you need to consider when putting together your succession plan – control, financial life planning and exit options.
Are you a control freak?
Many businesses owners can be and therefore how you deal with control or handing over control is a key determining factor when introducing or creating a succession plan.
Effective succession planning allows you to self-assess your attitude to control. Your attitude to control, strongly influences the outcomes of your business succession plan.
For example, if you are not prepared to consider a change in ownership, selling will be your primary exit option.
An effective plan will also allow you to identify strategic events that you can and can’t control. These can be divided into owner strategic events and other strategic events.
- Are you prepared to share financial information with key staff?
- Are you willing to appoint an advisory board?
Prevention is better than cure. Make sure your business succession plan includes ways to control or manage owner and other strategic events – such as changes in government legislation or specific changes to your industry
Business Value Gap Analysis
Business Value Gap Analysis is another integral component of effective succession planning.
Value Gap analysis determines what your business is worth today and what it needs to be worth at retirement to fund your retirement goals. It is particularly important when you are relying on the sale of your business to fund your retirement.
A shortfall in business value at retirement will greatly affect your desired standard of living. The worst case scenario would be that you may have to delay retirement or retire with a lower standard of living.
Your Business Value Gap is calculated by working through the following steps:
Step 1: Determining Retirement Income
Step 2: Determining Existing Retirement Assets
Step 3: Calculating your Business Sale Price
Step 4: Determining the Business Value Gap
Tom has estimated that he will need a retirement income of $65,000 to provide his current standard of living in retirement. To produce this level of retirement income, Tom calculated that he will need Income Earning Retirement Assets of $1,083,000. As at today’s date, his personal and investment assets total $350,000 and his business is valued at $395,000. His business value gap is therefore $338,000. Tom’s business succession plan therefore needs to include strategies to grow his business value prior to selling.
It could be that you need to grow before you go!
Can you list all of the different exit strategies available for you to exit your business?
When determining your exit strategy it is important to consider your life balance goals as your life balance position will influence your choice of exit option.
|Current Life Balance Position||Business Exit Option|
|Enjoying life while running your business||No immediate sale|
|Want to do other things but retain control||Part sale to family/staff|
|High business dissatisfaction, stressed||Sale of business|
Ensure that you are aware of all alternatives and the benefits available from each before deciding on your exit strategy. Succession does not just mean selling your business.
By assessing all options you will know that the decision you make is the right one for you and your business.
Get help from the experts
If your business is your major source of income and wealth, you must do all that you can to protect its current and future value.
Succession planning tends not to become a priority until it is too late. Don’t wait for something to happen – for example, ill health, a partnership dispute, relationship breakdown, major clients or staff leaving the firm.
Preparing a business succession plan requires a lot of planning.
If you want guidance from impartial experts, we can help.
We will work through your strategies, goals and objectives so they are not just thoughts. We will get them on paper and help develop an agreement that all parties are satisfied with.
In the meantime, keep an eye out for more articles from us, around succession planning.
We will be expanding on these points in the coming weeks, to help you understand all your options and how to plan for a smooth transition.
This will include case studies of what can go wrong – and how to make sure things go right!