Business Succession – Learn from the Errors of Others (Part 2)

business02Whether a business is worth $1 million or $100 million, the same principles apply when it comes to business succession.   After many years of experience in private company succession (and with over a third of a billion dollars of transaction value behind me) I see business owners falling into the same predictable patterns time and time again.

It’s understandable because while business owners are skilled at business operations, they have little experience in succession planning. After all, most business owners will sell or transition out of a business only once. Let’s take a look at some more of the key lessons to be learned (see Part 1 here).

Mistake #3: I am the Business

The nurturing of younger talent is an important job of any business owner. Too often business owners make the business all about themselves and don’t plan for their eventual exit. A business owner needs to have groomed a successor well in advance of exiting the business. Having a pre-ordained successor will not only save the business from extinction, but will actually increase the value of the business to a buyer. If you have no natural successor within your organization, and you are the business, you are in trouble. Letting go and planning for succession is critical to ensure maximum value is achieved on exit.

However, there are ways that you can have your cake and eat it too. A well-crafted plan will allow you to secure a home grown successor and leave open the possibility to sell your business to a third party. The key to creating a home grown successor is, firstly, identifying the right person and, secondly, giving that person sufficient incentives to grow the business. It may take several years to determine whether that person (child or employee) has the required skills to lead the business and care is in order. If the succession plan is implemented carefully, the business owner will retain control of the business and be able to replace the successor if things aren’t working out. In addition, the business owner will retain the option to sell the business to a third party.

Mistake #4: No Management Information Systems

If you have no idea of your profit margins, your sales numbers, what products are the most profitable and which are marginal, then you are in serious trouble. When financial information is easy to access in a timely manner, the business becomes more valuable. In other words, you need to have management information systems (“MIS”) in place that will allow you (and any purchaser or successor) have a clear picture at any given time of how your business is doing financially. Most businesses that have substantial value will have long ago implemented good MIS.

Keeping accurate financial records is vitally important to the successful running of a business. When the time comes to sell, bad record keeping creates even more of a problem. Sales and profitability figures are a key component to determining value and buyers are going to want to see concrete evidence of the company’s financial information. Deficiencies in the company records, such as errors in issuing capital or missing directors resolutions, will come to light at the due diligence stage. Rectifying the deficiencies is time consuming and costly. Businesses without good MIS can be un-saleable, or in other words, valueless.

Mistake #5: Failing to be Pro-active

There seems to be some reticence on the part of business owners to plan for succession. This is unfortunate, because planning ahead for succession can only add value to your business. Furthermore, “planning” doesn’t mean “selling”, so just because you are preparing for succession doesn’t mean you have to sell tomorrow. I have noticed that those business owners who implement a business succession planning process 5 to 10 years before their anticipated retirement date find that good things start to happen. It’s amazing the way planning for an exit focuses the mind on what needs to be done now to add value and get the business ready for sale. As a result of undertaking this succession planning process, many business owners find their businesses becoming more efficient, more effective, more valuable and more saleable.

If you want to achieve the best value for your business, then you need to avoid the common mistakes made by most business owners when it comes to business succession planning. Hiring professionals (lawyer, accountant and M&A advisor) with experience in business succession planning is the best advice I can give to business owners who want to avoid finding themselves in a bad situation.

Don Sihota is a partner of the firm and a member of the firm’s Private Company Transaction, Business Succession and Wealth Preservation Groups.
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