Business Succession – Learn from the Errors of Others

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Whether 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 of the key lessons to be learned.

Mistake #1: Never Letting Go

You may have built a successful business for which you deserve to receive many accolades. But if you’re in your late 60’s and have no succession plan you are in real trouble. It’s not unusual for business owners to work long past normal retirement age, which we tend to think of as 65. There are many reasons for this, for example, it can be hard to give up the income generated by the business, or perhaps the business owner can’t envisage a life away from the business. However, my experience with business owners and their businesses has taught me that not letting go can be fatal to a successful transition.

I have noticed that a business actually takes on many of the traits of the owner. Therefore a 40-year-old owner who is dynamic and growth oriented will create a business that is dynamic and growth oriented. That same owner as an 80-year-old will naturally have less energy and will also be more risk averse. Similarly, the business will also have less energy and will take fewer chances. Based on my experience, if the founder fails to exit the business prior to age 70, the vitality, value and saleability of the business may be seriously harmed.

The good news is that planning is one of the most important factors in making a successful transition to retirement. Planning for succession doesn’t lock you in to a specific retirement date, but it does mean you prepare the business for your exit at a time when your business acumen and decision-making ability are at their peak. Perhaps not surprisingly, this is often the period of time when your business is most saleable.

Mistake #2: Overvaluing the business

Another very common mistake made by business owners regarding their succession plan is valuing the business for more than its actual market value.

There are many ways to value a business, but most business owners will over value a business because they are emotionally attached to it. Perhaps the over valuation, this “X-factor”, is the emotional value attached to the business by the owner. However, purchasers will not pay for this X-factor. Purchasers make business deals based on cold, hard financial facts. There are generally accepted formulas for valuing a business and an experienced M&A advisor can assist a business owner in determining price. Beyond that, market factors can come into play and there will be periods of higher and lower demand in any industry. Furthermore, if the M&A advisor can generate competition for the business then this can drive the price up.

However, a business owner is unlikely to find a buyer if they are holding out for an unrealistic and unsupportable price for the business.

We’ll look at some more of the lessons to be learned from business owners who “did it wrong” in my next blog post.

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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