In 2015, my Dad was running a business in my hometown of Saint Louis, Missouri. He had been running this business for over two decades. In late 2015, he received the news that he had an aggressive form of cancer and only a few short months later he had sold his business and passed away.
It was an emotional time for our family navigating the new reality we were living in. One unfortunate result of my Dad his diagnosis was a forced sale with no succession plan. It caused additional stress and anxiety but also cost him being able to get fair value for two decades of work.
In this blog, I am going to break down the 5 core components of a succession plan. Follow these steps to maximize your exit.
What is a succession plan?
Do you own a business? Then you should have a succession plan. If you aren't familiar with a succession plan, consider these questions.
Can I afford to sell my business?
Who do I want to sell my business to?
Is this business going to be part of my legacy?
Do I have the right people on my financial team?
How do I want my employees to be taken care of?
A succession plan is a way for you to answer all these questions on your terms. When you have a plan in place it allows you to minimize downside risk and avoid any surprises. There is no one-size-fits-all in a succession plan, but I can tell you firsthand that not having one is not good. After all, you have likely worked your entire life to grow your business. My first-hand experience is that you want to maximize it. Let's look at the components of a winning succession plan.
5 Components of Your Succession Plan
1) Who are you selling to?
If you want to maximize your exit you need to understand who your buyers are. These are the most common answers.
Family
Employees
Private Equity
Strategic Buyers
Each one of these buyers provides a unique value proposition. Selling to your family could maximize the legacy you leave. Your employees have provided tremendous value. How will you reward them? Private equity can maximize your financial outcome, but it may come at a cost. Strategic buyers could be a great way to get a second bite out of the apple. There is no one right buyer, but there are wrong buyers. Knowing your goals will help create a win-win for everyone involved.
2) Who is on your team?
When you are looking to create a succession plan you need to know who is on your team. Your team needs to consist of experts in the space. Remember you may only get one shot at this. It is not the time to DIY. It is the time to find experts that can help you. Here are the people that need to be on your team.
M&A Attorney
Tax Professional
Sell Side Banker
Financial Planner
Insurance Advisor
You may have all, some, or none of these members on your team today. That is ok. The job of your team is to work together and help you find the right people for you. When you are building your deal team ensure that each member is holding each other accountable. Without teamwork, you can often find items falling through the cracks.
3) What is your ideal post-exit world?
Remember that you hold all the cards. You don't have to leave or sell. This is why considering your ideal outcome in advance is key. Your ideal outcome is going to drive your decisions and your team's decisions. Clear direction will allow you to zero in on the right buyers.
Are you looking to fully exit the company?
Are you staying on board with the company?
Are you looking to partially exit the company?
Your ideal outcome can only happen if you have thought about these questions in advance. Remember time will kill your deal. If emotions are high and time is short that is not the time to make these types of decisions. Hours of your time will be saved in this process by avoiding conversations with the wrong buyers.
4) What does it cost to be you?
Often overlooked by business owners is the cost of being them. After years of running their business, you will typically find many personal expenses that have become business expenses. There is nothing wrong with this if you factor it in. If you haven't you could be in a hurt of trouble. Here are the questions I would consider during succession planning.
What does your lifestyle cost?
Will this lifestyle change after you exit?
How much of your personal life is funded by the business?
Whether your succession plan is $1,000,000 or $100,000,000 you will have anxiety around your exit if you don't know the answer to these questions. Getting in front of your planning is the key to a stress-free succession plan.
5) What is your number?
Every succession plan has a number. A key to making the right decision for you is knowing what that number is. Flying blind into these conversations without a number in mind will make the decision to sign on that dotted line even harder. You will almost always think the company is worth more than the number presented. Having your number will give you a clear mind.
Can I continue living my lifestyle with this post-tax money?
Does this amount of money allow me to meet my goals?
Am I comfortable walking away for this amount?
Putting together a financial plan is the ultimate tool for answering these questions. A financial plan will allow you to project what your number needs to be. When you have an answer to that question it will give you the peace of mind to know your number is the right one.
At Moment, many of our clients have created succession plans. They have bridged the gap between what they have accomplished in business and what they need in their life. Knowing this answer has given them great confidence in moving forward with implementing a succession exit. If you are concerned about your succession plan, consider scheduling a call to see how we can help.
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Our goal at Moment is that no business gets put into the situation that my Dad was in. The only out was to sell and to sell quickly. This is why we help with succession planning. It is the best tool we have to avoid a bad outcome.
If you are an entrepreneur who is interested in succession planning, schedule a call, and talk with a Moment founder.
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*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.
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