Effective succession planning depends on an early conversations about transition

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Four tips for effective succession planning

The earlier you begin the conversation about transitioning your business, the more options you will have

Justin Brown, CPA

Transitioning a business in any industry is undoubtedly difficult. As a business owner, you’re likely not only responsible for business operations and leading workers, but you’re often the one who carries the brand recognition of your business and drives revenue

opportunities.

As we’ve come alongside businesses to help them with succession planning, we’ve noticed a few key themes. Following these four tips can make succession much easier and more successful.

Start now

It sounds like a cliché. But we mean it when we say, “Start now.” It might be scary or daunting to think about transitioning your business, especially when you feel you just got it off the ground. However, having a plan doesn’t mean you’re leaving your business today.

In fact, most business succession plans that we help implement for businesses take five to 10 years. The earlier you begin the conversation about transitioning your business, the more options you will have.

Perhaps the biggest advantage of starting early is the opportunity to maximize your business’ transaction price. When it comes time to sell, everyone wants top dollar for the company they’ve built up for years through hard work and sacrifice. To ensure this happens, the succession planning dialogue needs to start early. This opens the door to more strategies and transaction price optimization.

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Consider your personal plan first

The most successful succession plans we’ve helped implement are the ones in which the owners consider their

personal plans first. The business’ path forward intimately relies on what you want to accomplish personally, as an owner of the business.

We highly encourage any owner to complete a personal financial plan for themselves and their family, as it can help you answer critical questions, such as: • “How and when will I retire?” • “What are my financial needs?” • “What do I want to do in my retired years?” • “What are my personal goals outside of the business?”

This process uncovers critical information that helps pave the path for the business, including timeline, required business value, and selling vehicle options that align with your overall goals. With a documented personal financial plan, you’ll be able to see numbers on paper that will help chart the course forward for your business and hold you accountable to reaching your desired outcome.

Get out of the weeds

Business owners are a unique breed, having their hands in more activities than they would typically like. As part of your business succession plan, we recommend starting to build a management team around you. This may include chief financial officers, controllers, operation managers, and maybe even business developers. And once you’ve added or built leaders around you, share the knowledge you have with them.

If you’re the only one in your business who understands the operations and generates revenue, you’ve unintentionally backed yourself into a corner. Remember, potential buyers of your business aren’t buying you, they’re buying your business. Your business is much more attractive to a potential buyer if its strength and stability look promising beyond your departure. This requires you to get out of the weeds and start building a team around you to build strength and skill outside of just yourself.

Business owners are a unique breed, having their hands in more activities than they would typically like. As part of your business succession plan, we recommend starting to build a management team around you.

Don’t overlook key employees

You have plenty of vehicle options to consider when transitioning your business, including a strategic sale to an investment firm, selling to a competitor who wants to expand its brand or explore your specific niche, family members, or an employee stock ownership plan. However, time and time again, we encourage owners not to overlook their key employees as an option for transitioning ownership. Here are a few reasons why:

Key employees are typically invested and believe in your brand. This may mean that the core values, strategy and mission you’ve built will continue even when you’re no longer an owner. Selling to key employees usually means you can structure your transition to meet your specific needs and wants. If you were to facilitate a sale to a third party, your control of timing and design often takes lengthy and nuanced negotiations.

Employees who will one day become owners are interested in maximizing value, bringing in new business, training staff and protecting the business’ stability. This helps bring additional leadership to the table while you’re still sitting at it. Transitioning to key employees can be a multiyear process, allowing you to control the timeline while getting your new co-owner(s) up to speed. Additionally, while you’re in the process of transitioning, your salary, distributions and perks can continue for several years. With a third-party sale or employee stock ownership plan, this continuous cash flow isn’t typically available.

In conclusion

Owning a business can sometimes feel like delayed gratification. Most times, we see owners tirelessly working to build, build, build — wondering when they can enjoy the growth and success they’ve achieved. Starting the conversation about succession planning doesn’t mean you’re leaving your business today. However, it does provide you the peace of mind that the results of your hard work will continue when you’re ready to start checking things off your bucket list.

Justin Brown is a partner at Larson Gross CPAs & Consultants and the firm’s construction practice leader. He serves both owner-operated businesses as well as professionally managed enterprises and specializes in tax, financial statements and business consulting. He has years of experience coming alongside business owners to help them with ownership transition plans and strategic management planning.

For more information, visit https:// larsongross.com.

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