At some point in the life cycle of every business, due to a variety of factors, such as the retirement of the owner/ founder, personal issues or market circumstances, you must consider your business’s succession. Deciding the best options for the future is both an important and sensitive issue.
Often the owner or founder has a strong emotional connection to the business having put in countless hours of hard work and dedication. Yet in spite of this, a discussion on exit strategy and succession planning is frequently one-dimensional; ‘do I want to sell my business?’, rather than a much wider oversight of where the business is at in its life cycle, and the financial and personal needs to the owners.
Decisions on whether to pass the business onto the next generation of family, going public or selling all or part of the business, requires a well-thought-out plan. To achieve the right outcome for the key stakeholders involved, some important questions need to be considered, including:
- Do you wish to continue owning the business? Are you ready to retire?
- Is the business dependent on one key person (‘key man risk’) and how can this be managed?
- Is there sufficiently capable management to continue growing the business?
- Is the business your main income producing asset and how can this be unlocked?
- What are the estate planning issues that need to be considered?
When it comes to preparing their succession plan, many owners consider this process only when they are ready to exit their business. Leaving succession planning to the last minute, however, can heavily impact both the financial and personal outcome later down the track. We encourage business owners to consider their exit strategy well before their anticipated exit.
Exiting a business is a two-step process as shown in the diagram below. The first step involves determining your objectives and understanding the options available.
Issues to bear in mind include: when would you like to exit? Do you understand the current value of the business and how it’s derived? What would you like the business to look like in the future? How are you going to get there? And what are you expectations on sale? Are there any impediments to achieving these expectations?
An advisor will be able to work through these questions with you and develop a plan to align your personal and business objectives thereby improving the value of the business. The second stage involves the practical steps involved in selling your business or handing it down to the next generation. Achieving a successful outcome in stage two is often largely dependent on the comprehensiveness of planning in stage one.