Succession planning

by Contributor09 Nov 2016
By Craig West

Most business owners go into business planning to maximize the value of the business and extract that value (most often by selling) when they exit. But the research tells us that most don’t have a plan or strategy for how to do this and therefore often fail to either maximize or extract the value or both.
Achieving a successful outcome centres around both internal and external factors.
Internal areas
When it comes to internal areas, the question to ask is, “what are the key things we can focus on to ensure our business is valuable, attractive and saleable?”
In my experience, there are eight key areas to focus on when answering this question:
1 Size
Simply put, size does matter. There is plenty of research supporting the fact that businesses with a turnover of $5 million or more nearly always sell at higher multiples than their smaller counterparts.
While I am not in favour of growth for growth’s sake, designing your business to grow to at least this level of turnover will maximize value.
2 Business model
Is your business operating under a boutique or scale model and, even more importantly, is every aspect of your business aligned with your model? This includes: customer service online presence the people you employ your pricing strategy your marketing materials: I recently met a financial advisor who was looking after high-net-worth individual clients. He was extremely good at what he did and as a result charged a premium. But then he gave me a business card on very flimsy paper that looked like it had been printed as cheaply as possible
3 Revenue
Recurring revenue is vital. Do you have clients on long-term retainers, extended contracts, or some type of residual income trail?
4 Sales and marketing
Your business needs to be able to generate new business, leads and, ultimately, sales without relying on either your or a key person’s skill and sales ability. All businesses need a sales and marketing machine.
5 Systems
Save yourself time, effort and money: not only are systemized businesses far simpler to run, far less stressful and generally far less risky, but they are also more valuable.
6 Employees
Do you have an employee incentive plan whereby employees are rewarded based on performance? This could either be a profit share-based plan, or ideally an employee share ownership plan. This substantially reduces one of the key risks for buyers – that your employees will exit when you do!
7 Corporate governance and compliance
Corporate governance and compliance is often ignored by business owners as either something only large firms need to worry about or something that’s simply too hard and far too boring. Focusing on this area can add considerable value (particularly when we look at attracting the right type of buyer), as well as reducing risk.
8 Owner dependence
The business must be able to run independently of your involvement. For example, you must be able to leave for two months for a holiday in Europe without contacting the office, while the business maintains, continues and even improves its performance in your absence.
External areas
When it comes to external areas, the question to ask is, “what do we need to prepare to attract the right buyer (who will pay more)?”
Having bought and sold a number of businesses over the last 15 years, there are several factors that stand out to me when answering this question:
1 Strategic buyer
For every business there is a strategic buyer who will pay more for your business simply because they benefit more than most other buyers. The most common example of this is buyers with complementary products and services.
2 Information memorandum (IM) document
It is amazing to see the number of businesses, which are otherwise quite valuable, whose owners are prepared to sell up on the basis of a cheap, home-made flyer-style document. A well-prepared IM will be able to attract and convince the right buyer.
3 Tax planning
Every exit has several different elements of taxation. Inadequate planning in this area can cost you a large percentage of the sale price in taxation.
4 Due diligence and documentation
Many transactions fall over at this point, but this can actually be used to assist in improving the value of the business. If all of your documentation is complete, accurate, up to date and demonstrates a wellmanaged business, it will support your value proposition, not detract from it.
5 Negotiation
Being in a position to create some competitive tension by attracting several of the right buyers is a good start, but the  conduct of the negotiations and discussions leading to the actual sale is a very important aspect of the process.
6 Legal agreements
Often business owners are concerned that legal agreements will scare off the buyer, but this is very rarely the case. Far more importantly, legal agreements need to be structured to protect you after the sale – particularly around the key issues of any warranties, assurances provided, and also any event or finance included as part of the sale terms.
7 Corporate advisors
Business owners should not try to sell without the best advice. Well-represented businesses are generally taken far more seriously and are perceived to be far more valuable than those without representation.
A corporate advisor who has a reputation for selling good-quality businesses automatically positions your business in that category. Importantly, post-exit, you also need assistance with asset protection, estate planning and ongoing investment planning. The change from business owner to self-funded retiree is substantial.
Key outcomes
The correct implementation of the items outlined above will achieve two key outcomes: maximize the value of the business and successfully extract that value upon exit.
Craig West is president of the Exit Planning Institute and a strategic accountant with over 20 years’ experience in advising business owners. His practice, Succession Plus, provides mentoring, advice and strategy for clients looking to prepare their business for a successful exit. He is currently working on a PhD in Business Succession and Exit Planning.