Business Succession planning raises some questions – can your business survive without you? Who will take over if you’re unable to run it? A business succession plan sets out the steps you’ll take to transfer your business to the next owner and chief.
While handing over the reins sounds straightforward, it can actually take years to prepare and sell your business. By investing the time today to write your succession plan and find ways to make your business more transferable, you’re more likely to experience an orderly exit and receive greater financial rewards when the time comes.
Here are five factors to consider when preparing your business succession plan:
Business Succession Planning Roadmap
1. Succession Date
Setting a date or triggering event for your exit is like keying in a destination on your GPS. Without them, you’re on the road to nowhere.
While business succession planning is often associated with retirement or unexpected illness, brokers Xcllusive Business Sales reports that only 38% of owners take a business to the market due to retirement, and 8.8% do so because of health issues. Other reasons include relocation, pursuing other business interests, career change, internal business issues and lifestyle change.
These statistics are a reminder that you might want to exit your business much sooner than you anticipate.
2. Exit Options
There are four main ways to exit your business. You’ll need to consider your finances, the marketability and performance of your business, and the availability of a suitable successor to determine the best alternative.
Family Succession
As reported by Family Business Australia, family businesses account for 70% of all businesses nationally.
For many, passing your life’s work to a family member is a natural step. However, family handovers can have a negative impact on the business – especially if multiple family members want to take over. Statistically, only 30 percent of family-owned businesses survive into the second generation and just 12 percent into the third.
It’s crucial to have a clear succession plan detailing:
- Who will take over the business,
- The expected roles and responsibilities of each family member,
- What the future leadership structure will look like, and
- How each family member will be remunerated
Being definitive about how and when the transfer of control and ownership will occur can go a long way to minimise friction amongst family members.
Employee Buyout
Selling your business to a key employee takes the effort out of finding a potential buyer and saves you the cost of engaging a broker. The negotiating process is likely to be quicker, and provided he or she is well-regarded, an internal sale will provoke less panic amongst staff and customers. Importantly, there’s a bigger chance of maintaining existing quality and culture too.
But someone who knows your business inside out – both its strengths and weaknesses – might offer a lower price than an external buyer. Having the cash to pay for the business is another issue, and you might need to offer some flexibility through instalment payments.
Selling to an External Party
Another option is to sell your business to an external buyer.
Finding a potential buyer takes time. You may need to work with a broker, advertise online or through your network, and attend industry-related conferences.
You’ll need to value your business and prepare it for sale. The closer you can get it to a “turnkey” business, the more attractive it’ll be to buyers – and the more they’ll pay for it.
Sell to co-owner
Of course, if your business was founded with someone else, a common approach is to simply sell your share of the business to the co-owner.
3. Transferability
A key benefit of business succession planning is that it requires you to think about how to make your business more transferable. By making it easy for the new owner to step in and take control, you’ll increase its value.
Here are some good places to start:
- Document standard operating procedures and your organisational chart, and build an employee handbook.
- Ensure staff are fully trained
- Make sure your financials are accurate
- Automate business systems and processes as much as possible
Related: find out more about ASIC change of directors.
You can automate much of your accounting system by connecting to cloud accounting software. Products such as Xero allow you to integrate financial and business processes like bank reconciliations, invoicing, accounts receivable, accounts payable, payroll, job costing, expense management, and more. With hundreds of apps available, you can run your business efficiently and view its finances from one central place. Reach out to POP if you’d like to get set up with Xero for 20% off your subscription.
4. Business Valuation
You’ll need to have your business professionally valued, and have this updated regularly. This valuation reflects the profitability of the business, the performance of staff, the processes you have in place and general market conditions.
But there are ways to increase your valuation. The key is to identify business strengths and enhance them further, as well as improving weaker areas.
5. Financial Implications of Business Succession Planning
Whether you’re selling your business or gifting it, there’ll be financial implications for you and your successor. You’ll need to work with an accountant to understand what they are and identify financial risks or opportunities.
You’ll also need to think about the payout terms – will you provide seller financing to the potential buyer and accept staggered payments, or will they need to pay for it outright?
Key takeaways of business succession planning
Formulating a business succession plan and taking steps to improve the transferability of your business allows your organisation to develop a life of its own. It creates greater certainty for you and your successor and enhances its sale value.
But business succession planning is best done with the help of external professionals. As trusted accountants for many small businesses, POP can assist you every step of the way – from identifying process improvement opportunities and connecting you to the cloud to reviewing your financial records and evaluating your exit options.
We’ll talk you through the selling process, so you know what to expect from your brokers and lawyers, and how to get through buyer due diligence.
If you want to get started with your succession plan, contact POP today!
