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. 

Control

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

For example

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!

Exit Options

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.