Control is a key factor in business succession. If you do not control your business succession you will not realise the potential benefits that are available. However, certain pressures will impact on your succession that you cannot control. It is critical that you understand exactly how control affects your succession. In summary identify the key elements of your succession that you:
- Can, and therefore must, control
- Cannot control and establish strategies to minimise the impact of these
Make sure that you fully understand how various succession options impact on your ability to control your business as they may be a key factor in deciding which option is best for you. You must also be aware that as you progress with your succession, you will lose control of your business. Where your exit strategy involves a staged exit, this will mean that you have to work alongside new co-owners – this adjustment can be hardest for sole proprietors who have spent their lives building the business.
What You CAN Control
The key to Effective Succession Planning is empowering you to be in a position where you can directly control most variables that will be encountered. Starting to plan for your succession early will enable you to identify most of the variables involved, therefore increasing the probability of controlling them. The effectiveness of this however, will also depend on the succession planning process that is followed.
This can be demonstrated by way of an example. Take two identical businesses:
- Both have business owners, aged 55 and 56
- All principals want to retire at aged 59
- Both businesses have annual income of $2.5m and (adjusted) profit of 25%
- Both businesses have current valuations of $2.8m (capitalisation rate of 4.5x adjusted earnings before interest and tax (EBIT)
The first business ignores succession planning and sells to an external planner in 4 years’ time for $2.8m (ignoring future growth and inflation etc).
The second business investigates and implements an Effective Succession Plan, addressing issues such as historical performance against industry benchmarks, a staff improvement program and tripartite arrangements with alliance partners for growth opportunities. Over the next 4 years it grows its income to $4m and improves the adjusted profit to 30%. At the same capitalisation rate, this business has improved its value to $5.4m.
On top of the higher sale price that the business owner can command at exit, there have also been ongoing benefits such as increased annual benefits to the owners, and greater levels of staff retention.
Basically, you are able to control everything internal to your business. To establish the most effective succession plan, you must determine those elements that will have the most impact on the success of your plan.
Typically, these elements include:
- Profitability of the business
- Quality of staff
- Effectiveness of systems to run the business, reducing business owner reliance
- Infrastructure of the business (MIS, Human Resource policies, etc)
- Condition of physical assets of the business
- Clients profile
- Quality of selling documentation
If you do not leave yourself sufficient time to get these elements in order prior to your succession, you are not really controlling your succession.
What You CANNOT Control
There are many factors that impact on your succession that you cannot control. Typical examples include general economic conditions, changing regulatory environments, the impact of competition, even the health of the business owner, a negative factor which may impact the timeframe over which the succession needs to be completed.
An example of this arises when considering staff. We all know that a business is only as good as its key personnel and many owners think “I cannot control my staff deciding to resign.” The resignation of key staff in the years preceding the owner’s succession is one of the last things that an owner wants, as it can negatively impact on the business in a number of ways.
A good succession plan should incorporate strategies that will provide significant incentives to retain key staff. Leading strategies are ‘performance based’ and can therefore be paid at no net cost to the business. They may even provide the opportunity for staff to self-fund their entry into ownership.
The earlier you start planning for succession, the more time you will have to make your business sale-ready. The better the succession program that is followed, the greater your control will be over the factors that impact on the outcome of your succession.
Every business is unique but they all need to plan for the future. If you think you may need help with succession planning, please feel free to contact our office for a no-obligation, confidential initial discussion.