Succession Planning and Questions to Ask Before Selling Your Business

03/01/2021

Business owners have more on their minds other than who will run their company in the future. That, however, does not make succession planning any less important.

It’s vital to think about the long-term future of your business—including what will take place after you have handed the leadership reins over to someone else.

Below are questions to consider when devising a succession plan for your business:

What are your post-business ownership plans?

How will you spend your days after selling your business? If you plan to retire and take it easy for a while, you should work closely with a professional wealth advisor to develop a detailed retirement financial plan. This will help ensure you have sufficient resources to support your desired retirement lifestyle.

If you desire to start another company after you sell your existing business, you’ll want to ensure the proceeds from the sale of your business are sufficient to launch your new venture.

To whom will you sell the business?

Business buyers usually fall into one of two broad categories: internal buyers or external buyers. An internal buyer may be your existing employees or management team. In this case, the business sale could be conducted via an employee stock ownership plan (ESOP) or management buyout (MBO). It could also be made to family members if yours is a family-run business.

There are two main types of external buyers: financial buyers and strategic buyers. Financial buyers, such as private equity groups, look for companies with high-growth potential that they can later sell at a profit to reap a return on their investment. Strategic buyers, meanwhile, seek businesses whose products or services complement their own (such as a competitor). This kind of merger can help the buyer gain market share by acquiring your customer base and consolidating operations.

How can you add value to the business before taking it to market?

The best way to increase the eventual sale price when selling your business is to focus on key business-value drivers today.

Here are some things you can do now to make your business more valuable in the eyes of buyers while reducing potential risks:

Ensure your corporate records, contracts and other legal documents are all current and in good standing
Make sure your financial statements are accurate and current
Develop a seasoned and experienced management team that’s prepared (and financially incented) to help ensure a smooth transition to new ownership
Have a realistic business growth plan in place that will enable buyers to realize positive ROI on their investment

How much is your business worth?

Many owners assume they know what their business is worth based on their gut instinct or what their buddy sold his business for. But this value is often unrealistic. Most owners have an emotional connection to their business and tend to over-value the sweat equity they’ve put into building it.

Buyers will look at the value of the business from a purely numbers and analytical approach. Their main concern is the quality of business earnings and how repeatable these earnings will be in the future. Therefore, engage a valuation professional to conduct a quality-of-earnings study to estimate the future cash flow potential of the business and come up with at least a rough business valuation.

Who will form your business advisory team?

Selling your business is a lengthy and complex process that requires high-level expertise. Begin forming a business advisory team that includes an investment banking firm to market your business, a valuation professional to help you gauge business value and determine the selling price, an experienced M&A attorney, and a tax advisor who specializes in the sale of closely held businesses.

It’s smart to start the succession planning process now, even if you do not intend to sell your business anytime soon. This way, you’ll be ahead of the game when you’re ready to exit the business in the future.

For additional information on succession planning, or for assistance on building a succession plan, contact Michael Ceschini of Ceschini CPAs at: (631) 474-9400.