In the last instalment of our Succession Planning Series we covered the steps involved in successfully transferring ownership of your beloved business to employees. This is one possibility when it comes to the succession of your business but how do you decide which path will be the best one to ensure the ongoing success of the business in which you’ve invested so much?
Let’s take a step back and examine the steps involved in planning for the succession so that you are equipped with all the knowledge and information necessary to make the very best decision for you and the long term success of your business.
Why should I start planning for the succession of my business?
You may be enjoying not only the fruits of your entrepreneurial labours but also the challenges and triumphs of the day-to-day operations of your business. That’s as it should be, however, the need for an exit strategy will eventually rear its head and demand your attention. You may not yet be considering your exit or what will become of your successful business when you are ready leave it, but succession planning is just that: planning. Neglecting to plan for the transition out of your business can have disastrous results, not the least of which is the loss of value in what you’ve painstakingly built.
Succession planning takes time, sometimes years, to determine, and prepare for, the best course of action in moving towards the next chapter in the life of your business. Better to get the jump on the planning rather than have something sneak up on you unexpectedly, such as illness in many cases, where you’re left scrambling to make important decisions under duress.
What are my options?
One of the most important things to determine is exactly what exit options are available to you and will be the best fit for your individual business. Some common exit strategies frequently employed:
Passing the business to a successor. This can be a family member or manager within the company. Establish the ideal profile for your successor. Then, identify and evaluate potential candidates using fair, measurable criteria.
Transferring ownership through a management or employee buyout. In the acquisition of the company, the management, a group of employees or combination thereof pool resources. This can be one of the best options if there isn’t a clear candidate for succession or if the owner considers preserving the existing corporate culture a priority.
Selling the business to a third party. This route includes several options in and of itself.
- Initial Public Offering (IPO)—The sale and/or issuance of shares in a private company on a public stock exchange.
- Private equity—The sale and/or issuance of shares to a financial investor.
- Sale to another business—The sale and/or issuance of shares to another operating company. This is a good option for shareholders looking for a clean exit and the highest possible value.
The transfer of the business.
While the process is unique to every business, the transition typically takes form using the following steps:
- Setting financial goals.
- Determining legal requirements
- Establishing objectives
Identifying and preparing my successors to take the reins.
Whether it’s a trusted and capable manager, or a family member a successful succession will only come with shared values and beliefs, collaboration and, probably most important, open and consistent communication between the founders and the new generation of owners.
There are many considerations to take into account before making a final decision about the route of transition, but don’t forget, thinking long-term, to make sure the type of succession you choose is aligned with your vision for retirement. It’s easy to underestimate, as we tend to get wrapped up in the immediate concerns, but succession planning is time intensive. It’s recommended to give a lead time of at least two years prior to your planned exit to ensure a smooth transition, regardless the means.
In the spirit of ease, and keeping the succession as stress free as possible, it’s important to consider carefully your team of support. Make sure you’ve enlisted qualified, experienced professionals to help you navigate the succession waters.
Read more about the ins & outs of succession planning at BDC.