When the time comes for you to leave your business, will you be ready?
Succession planning is absolutely essential to making a smooth transition to new ownership and management. You need to give it a good deal of thought in order to plan your exit strategy carefully, and to maintain the value you’ve built up in your business. A good succession plan will help the transfer of your business go smoothly, and allow you to maintain good relationships with employees and business partners. Succession planning helps you: • Protect the legacy of your business • Maintain a service for your community • Build value for your business • Provide financial security for your family and your stakeholders • Deal with unexpected events (illness, accident, or death) • Prepare for the future There are two kinds of exit planning: first, the ongoing process of developing “bench strength” throughout your business and preparing your talented people for career growth and promotion; and second, preparing the business to operate without you, eventually and catastrophically. (“Eventually” means when you choose to leave; “catastrophically” means if you get hit by a bus before your time.) The next step in succession planning is estate planning. This focuses on planning the disposition of physical and financial assets during your later life, and at death. It’s the complex but very important process of working with experienced and trusted advisors, including a business and tax lawyer, accountant, financial planner, and life insurance professional. The cost of not getting this one right can be huge, both financially and in family strife. The truth is, “You’re going to die. Tidy things up.” An exit strategy is a plan focused on how and when you, as the business owner, will exit the business effectively and profitably. Key factors here will involve your heath; your ability to lead and manage; your level of interest in the business vs. other things; and the financial realities of the business and your life. For example, you may continue to own the business, but not manage it. Every business eventually gets sold – either to a family member, to a group of employees, or to an outsider. (Unless, of course, it just quietly and unprofitably fades away and closes.) So every business should be run with a successful transfer in mind. In order to make your business more saleable some day, you need to have a checklist of what a buyer is actually buying, to see what might need more attention in your business. There are 11 things that a buyer is willing to pay for. On a scale of 1 to 10, with 10 being excellent, you need to objectively rate your current performance in each of these 11 key areas. Then calculate your Salability Score.
Exceptional, growing, and sustainable profitability. Cash flow is king. Without a healthy and growing cash flow, no one will want to buy your business, except maybe at a fire-sale price that you’re not going to like.
A relationship with loyal and profitable customers. Profitable and loyal customers are the well from which future profits come. Do you have a large number of profitable customers or members who prefer you, are loyal to you, and go out of their way to do business with you? Do you have a database of those customers or members, and do you use that database to proactively communicate, add value, and nurture the relationship?
An industry that is growing and sustainable. Is the automotive repair business growing in your market, staying about the same, or in decline? Are changes in lifestyle, demographics, property taxes, or other government legislation affecting the sustainability of automotive repair services in your market?
A trusted, clear, and sustainable brand is generally worth big money to a buyer. It is the sum total of all the goodwill that you’ve built up over the years, one customer at a time. What are you known for and trusted for, that really matters to a lot of people with money to spend? A brand is a promise to deliver a consistent set of values, standards, and experiences that your target customers want in their lives. To have a clear brand, you must effectively communicate a clear promise about value, and values, that resonates with your target customers. Then you must live by and deliver that promise, every day. How do you score on this one? A world-class, capable, engaged, and empowered team. No one wants to buy a business that can’t survive without an owner who is about to leave. And no one wants a business full of mediocre, disengaged, or toxic employees. Your team is a big part of your business’s value.
A culture of respect, efficiency, and accountability. Nobody wants to buy a business with a toxic, dysfunctional culture.
Systems, processes, and technologies that help deliver an extraordinary customer experience and world-class operational efficiency. Do you have up-to-date systems, processes, and technology, or are you always playing catch-up and making things up as you go along?
Machinery and equipment that’s current, efficient, and in good condition.
Patents, trademarks, or secret recipes that provide premium pricing and protect the products, brands, or intellectual property of the business.
Inventory and real estate. Inventory is a big factor in the value of your business, depending on its age and desirability. If you own the land and building in which you operate, that could be worth far more than the business itself. I generally advise clients to own the real estate in a separate real estate holding company and have your operating company pay your real estate company rent each month. Then, when it’s time to sell the business, you either get rent from the new owner, sell them the real estate separately, or invite them to relocate the business, and you sell the real estate to someone else – perhaps for a very different end use.
A clear and documented vision for your business that allows a potential new owner to visualize and embrace the possibility of an extraordinary future. To calculate your Salability Score out of 10, recheck your individual scores to make sure you are being absolutely realistic. Then, total your score for the 11 points above, multiply that total by 100 and divide the answer by 110. Your Salability Score is ____ out of 10. The closer your score is to 10, the more saleable your business is. So, how does your business rate on salability? What needs your attention and when will you start? It takes years to get a business ready to sell or transfer. Starting now is a good idea. To determine whether you are building a profitable and saleable business, or just buying yourself a job, consider these five questions. 1 Does most of the knowledge or customer value in the business revolve around you personally? 2 Are you barely making a living? 3 Are you in an industry or market that’s unattractive or confusing to most prospective buyers? 4 Are you in a type of business that others could easily start up on their own, without paying you a penny? 5 Have you “fiddled” the books to show little or no profit in order to avoid paying taxes? If you’ve answered yes to any of these five questions, you’re probably in trouble when you want to sell your business.
How do you know when it’s time for a transition? The short answer is that most people don’t know when it’s time. They can’t imagine their life without the business. It defines their value, it’s where they feel safe and in control, or they hate the thought of spending more time with their spouse. The business is their “neat fort,” and they don’t want to leave. From my experience as a business coach, here are five reasons to transition out of your leadership or ownership role. 1 You have all the money you need and now have other things you’d rather do. 2 It needs someone else to take it to the next level – and you’re wise enough to know that. 3 You’re tired, and just can’t do it anymore. 4 It’s losing money, sucking you dry, and you don’t know how to fix it. 5 It, or some asset in it, is worth more to someone else than to you.
A real-life example of succession planning gone wrong I’m currently coaching a business owner in a different industry who woke up one morning and said, “I’m 67, I’m tired, and I just can’t do this anymore. I want someone to write me a big cheque so that I can walk out of here as soon as possible.” He called me for help and we quickly determined that he needs at least $5 million for the business, to pay capital gains tax and retire in respectable style. The problem is, his business is currently worth about $300,000…tops. When I told him that businesses in his industry typically sell for three to four times sustainable earnings, he flipped out. Nike stock trades at 35 times earnings, Lululemon at 26 times earnings, and Under Armour at about 85 times earnings. But small- to medium-size private companies sell for three to five times sustainable earnings. It seems unfair, but that’s reality. He has two adult kids in the business, and they think dad is going to hand it over to them as a gift. But there’s no way that they could run the business – except into the ground. As a further wrinkle, his older brother owns half the shares in the company, by inheritance, but has never worked a day in the business. They’ve never discussed what will be a fair split of the proceeds when the business is eventually sold. This makes no sense, but I see this kind of “untidiness” all the time – and it always ends in a mess.
Important points from this example: 1 First, your business is almost always worth less than you think or hope it is. The exception might be when your business is sitting on what has become a hugely valuable piece of real estate that’s now worth more than the business itself.
2 Second, it generally takes four to six years to get a business ready to sell at a decent price, and to put all the pieces of the financial and people puzzle in place to make that happen smoothly and profitably. A buyer won’t magically show up tomorrow, just because you’d like him to.
3 Then, there are the kids. In my experience, they’re usually not as smart, capable, or interested in the business as you think they are. Sorry! When they are interested in the business, and also capable of working in it and running it someday, you don’t have a problem. If they’re not interested and not capable, you also don’t have a problem. They’ll choose another career path. If they’re capable but not interested, you don’t have a problem. They’ll go their own way. But, if they are interested but not capable, you have a succession planning and exit problem. They might work in the business, but they won’t be the wise choice to run it someday. That’s reality, and you’ll have to deal with it. If you have a number of children, and some of them help grow the business and some go their own way, how do you divide the assets of the business in your will? Does everyone get the same share of the business, or the proceeds of the sale as a birthright? Or do those who helped grow the business benefit from their hard work? This is a tough one – but “fair” isn’t always equal. And, by the way, your kids should go and work in somebody else’s business, preferably a very well-run one, for at least three years before they come to work full time in yours.
4 Next, we have the issue of other family members like brothers, sisters, or cousins in the business, or non-family partners. Respectful debate should be encouraged, but somebody has to be the clear leader and final decision maker, or the business will flounder. And no family member or partner should have the job they do, or the salary they do, if they’re not the best candidate available for the job. It’s bad business. Much of my business coaching work involves sorting out some of these kinds of messes.
6 Tidy up all loose ends with proper documentation. Discuss everything that needs to be discussed, come to an agreement, and then document that so there’s no misunderstanding, or worse, fights and lawsuits, down the road.
Bonus Tip: Selling your business to family members or employees for a promise of future payment is always risky. If the business fails, you could lose everything. Get expert advice on how to structure, finance, and protect yourself in any such deal. When selling your business to a third-party buyer, never accept a two-part payment scheme where you get some of the money up front and the balance in a year or two – unless you’re happy with the first payment being the only payment. Buyers typically offer a two-part payment in order to have time to make up a reason not to make the second payment. I see it all the time. Just say no.
Prepare yourself for the huge change in your life It’s one thing to prepare your business for transition, but you also need to prepare yourself. How will you stay active, healthy, sane, and engaged? Here are the two questions that I ask my clients who are preparing to exit their business.
1 How can you be helpful? You’ve seen a lot, done a lot, and learned a lot. Who could benefit from all of that? Who could you mentor, coach, and encourage? Look around your community or around the world to see where you’re needed. Helping others will add years of meaning to your life. This could actually be the most rewarding period of your whole life.
2 What have you always wanted to try, do, or see? People joke about having a bucket list, but it’s actually a good idea. Make your list. You’ll be amazed at how many things you’ve put off. Now is the time to keep promises to yourself, your spouse, your family, and your community.
Do you have a realistic ongoing and eventual succession plan for your business and your life? Whether you’re the business owner, or a manager in the business, this matters to you. Good managers will leave (and should leave) if they think the business has an uncertain future. nJN