Planning a business succession: 5 reasons to start now
Read time: 3 minutes
Planning a successful business succession takes years. According to experts, transitions can take up to five years to complete and, in the case of a family business, as many as 10, depending on the firm’s size and complexity.
Yet, a 2017 BDC survey of 2,500 entrepreneurs found that five out of six entrepreneurs surveyed estimate that the process will be completed in two years or less from the time they meet with potential buyers to the moment the eventual sale goes through.
For entrepreneurs planning to sell their business, the best strategy is usually achieved by not rushing things and by taking the time needed to ensure a smooth transition.
Creating a succession plan is a great way to ensure you get the full value for your business or are able to pass it along the way you had hoped. This is especially true if unexpected trouble arises, such as a surprise health problem.
“Selling a business can be quite challenging and usually takes longer than people expect,” says Matt Price, a Managing Director in BDC’s Growth & Transition Capital team, which finances business transitions.
Here are five reasons why Price says you shouldn’t wait to start succession planning.
1. It clarifies your options
You may have an idea in your mind of what your succession will look like, but you may be in for a surprise when you go ahead with it. For example, your plan may be to sell your business to an external buyer. But many entrepreneurs struggle to find an outsider willing to purchase their company. Instead, an internal successor—such as a family member or manager—may be your best candidate to take over.
“Succession planning gives you an honest assessment of your options,” Price says. “Many entrepreneurs aren’t aware of their options and think it will be easy to sell their company.”
2. You can prepare your successor
If your successor is a family member or manager, you need time—five years or more is normal—to get them ready. They need to learn how all parts of the business work, gain needed expertise and build relationships with employees, suppliers and customers.
3. You can prepare your company
You need time to optimize the sale value of your company. This means making sure it has good growth prospects, a record of profitability and a solid balance sheet. You may need to invest in the business, remove personal expenses from the books and consult an accountant on how to structure the sale to minimize your tax liability.
You also need to prepare your company to operate without you. For example, you should document your business processes so that someone new can easily take over. Your employees should get training so they consistently execute these processes as documented.
4. You can arrange financing
You need to start talking early on with bankers about financing for the transition, especially if it involves an internal successor who doesn’t have a lot of capital to invest. You may have to use a mix of financing, including the buyer’s investment, vendor financing, a term loan and mezzanine financing.
5. It’s an emergency plan
Many entrepreneurs have a hard time letting go of their business. But having a succession plan in hand is useful as a just-in-case emergency contingency, even if you’re not planning to exit any time soon.
“If you leave it until a health issue comes up and you need to sell, you’re not going to optimize your company’s value and you’re probably going to leave your family with a larger-than-expected tax bill,” Price says. “And that’s not to mention that the business will have a hard time continuing normal operations.”