It’s not surprising that many new business owners devote little thought to their exit strategy. They have way too much going on today to worry about tomorrow.
Still, putting together a business succession plan as soon as possible is part of being a responsible business owner. After all, illness, disability or family obligations could force you to sell out sooner than you’d planned.
And even if you eventually do exit according to your own timetable, you’ll want to do it properly, both to maximize your profits and ensure a smooth transition. This is especially important when passing the business on to a family member or longtime partner. You want to avoid misunderstandings that could strain the relationship and put a damper on your well-deserved retirement.
Visualize the Moment
The first step in planning your succession is deceptively simple: Stop and think of exactly what selling your business would mean in practical terms.
It’s a lot more complicated than simply retiring from a job where you work for someone else. There are many potential loose ends in the sale of any business, and the sooner you tie them up, the better. A successful sale can’t happen overnight; it can take up to two years to work out all the details.
Document Your Processes
Again, to some extent, this is an exercise in visualization. Put yourself in the shoes of someone who knows nothing about how your business runs. If they were to walk in the door today as the new owner, how would you explain what they need to know in order to keep things operating smoothly?
You’d need to provide a breakdown of your infrastructure and one or more of the following procedures, depending on the nature of the business:
- Technical support
- Customer service
- Human resources
That’s a lot of ground to cover. It can involve everything from providing a contact list for your vendors, to outlining a companywide org chart, to documenting steps for the proper way to hire and onboard employees. In all likelihood, you won’t understand every detail yourself. That’s why the next step is so important.
Build a Network of Experts
Here’s where it helps to look backward as well as forward. Remember all the trial-and-error you went through as you figured out the most efficient, cost-effective and profitable way to run your business? It took time, but eventually you learned where to turn to get the support you needed. And it’s that intangible support structure, as much as the hard assets of your business, that will be key to an effective succession plan.
The network of consultants and advisors who can assist with a successful transition includes a business broker, a lawyer, a Certified Public Accountant and — last but far from least — a bookkeeping services provider.
Even if you don’t plan to sell the business for many years, it’s vital that you line up good bookkeeping support today. Solid financial analysis is the bedrock of any successful sale. When a prospective buyer (or the prospective buyer’s lawyer) does their due diligence on your business, they’ll expect to see up to five years’ worth of clean, professional bookkeeping records. Any gaps, inconsistencies or IRS penalties will be bright red flags.
Selling to a Relative
You have much more invested in your business than money and time. You also have a good deal of emotional equity. For many business owners, it’s important that their succession plan ensures they preserve their good name and establish a legacy. And one of the most obvious ways to accomplish that goal is to sell to a family member.
Unfortunately, many business owners fail to begin the process soon enough. According to the Conway Center for Family Business, “Even though nearly 70% of family businesses would like to pass their business on to the next generation, only 30% will actually be successful at transitioning to the next generation.”
The center offers another stat that helps explain why that is: “Nearly half of family business owners (43%) have no succession plan in place.“
Remember: Your Business Is Bigger Than You
Think of all the people who have come to depend on your business, including your family, your employees, your suppliers and your customers. If something were to happen to you, could your business continue to fill all those different needs?
If not, then you haven’t been completely successful — not until you put together a succession plan.
Sandra Finerghty, Managing Director of Supporting Strategies | Durham & Chapel Hill, NC, provides outsourced bookkeeping services, controller services and operational support to growing businesses.