Getting Started on a Succession Plan

As a successful business owner, you still may reach a point where life’s realities are at odds with your career. Your health might decline, making it more difficult to keep up the pace, or you may just be tired of working so hard and decide to step aside. Whatever the reason, you probably plan to sell your business and use the proceeds to help finance your retirement. However, waiting until the last minute can be a trap. If you are eager to sell and move on with your life, you’ll be in a poor position to negotiate terms with prospective buyers

Realize reality

Your chances of selling your company for its full value will increase if you develop a succession plan, and such a plan will be more effective if you begin years before an anticipated sale. A viable succession plan has many moving parts, but one way to start is to get a reasonable idea of what your company is worth. You may have heard that another company in your industry was sold for a certain price or that businesses in your industry sell for X times net operating income. Thus, you have an idea of what a buyer would pay for your company. Your expectations, though, may prove to be inaccurate. In most cases, buyers will look at your company as a unique collection of products, services, customers, and employees, and they will make an offer based on their estimate of future profitability. Consequently, you should have your company valued by a knowledgeable appraiser, ideally a few years before putting it up for sale. Look for someone experienced in appraising companies in your industry. You’ll probably have to pay several thousands of dollars for such a valuation, but you’ll know what you reasonably can expect to receive, and you might get ideas about how you can make your company more attractive to bidders.

Select a successor

When you’re ready to sell, you can just put your company on the market or contact a business broker.With this approach, though, you may not know who’ll be taking over your company. Will the new owner antagonize long-term employees or customers? If the deal calls for a buyout over time, will the new owner keep the company healthy enough to make the ongoing payments to you? Such considerations may lead you to choose your successor as part of your succession plan. Your first thought might be a relative, assuming that person is capable and enthusiastic about taking over. Keeping your business in the family may not be possible, though. You may consider a current employee. Promoting from within can ensure that your successor already is familiar with your company’s staff, customers, and suppliers. If you don’t already have a relative or current employee in mind, you can hire someone to groom for an eventual buyout. Whatever path you choose, it is best to start planning early.

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