Create a succession plan
You will make better business decisions by planning ahead. If you start your succession planning early, you will have time to get outside advice, deal with unforeseen issues and avoid last-minute decisions that could prove costly.
Although unique to every business, a succession plan consists of a series of steps, including determining your objectives, identifying a successor, dealing with legal and financial issues and getting a valuation. It’s often a complex and sometimes emotional process for a business owner and his or her family.
Here are some of the most common exit strategies.
If you intend to transfer your business to a family member, it's important to ensure your family is fully aware of your plans and has a chance to voice concerns and interest in the business.
One of the most obvious advantages of opting for a family transfer as an exit strategy is that your family will benefit from your business legacy. As well, family members who are already involved in your business may require less coaching.
Management buyout (MBO)
The sale of a company to its management team has several advantages for entrepreneurs.
Notably, it can ensure uninterrupted continuity because the new owners already have experience with the company. For this reason, your company is more likely to keep its existing clients and business partners.
Selling to outside buyers
Selling a business to outside buyers is typically more definitive and involves fewer variables than a family succession.
Entrepreneurs should appreciate that the price they receive for their company might be more or less than the appraised market value. While many business owners tend to overestimate the pricing of their businesses, a surprising number underestimate it.
Getting the full value for your business
Whether you're passing the company to a family member, your management team or selling it to outside buyers, keep in mind that you will need a business valuation that establishes a fair value for your business.
Putting a dollar value on a business takes time, and you will need to have a specialist who can look at your assets, liabilities and goodwill with an objective eye.
Prepare supporting material
Smart buyers will certainly delve into your business’s financial and operational history. So you should be sure you're armed with the accurate figures and supporting material to help you negotiate the price you're looking for.
Company owners should keep in mind that the value of a business is not just based on financial statements. The number of customers you have, for example, could also be a determining factor.
Succession planning should begin at least 18 to 24 months before your desired exit. Succession planning takes time because of complex issues such as business valuation, legal and tax considerations, family matters and coaching successors.
The earlier you start, the more time you will have to take an objective look at your company and prepare for the transition.