Webinar Recap: Business Succession Planning

After a year of pandemic living, business owners – like the rest of us – are wondering what’s next. For some – especially those who built back after 2008 only to be hit again by 2020 – the near future involves selling. In fact, a recent survey of business owners found that 76% (or 4.5 million businesses) plan to transition in the next 10 years.

Our March webinar reviewed several key aspects of business transition.

One tip before we hit the highlights: Choosing the right business succession strategy is complex. We strongly recommend that you start early and consult with your personal advisors (attorney, CPA, wealth or financial advisor, family members, etc.) before making decisions on these matters.

Business Transition Success Rates

The hard truth is that many business successions and sales fail:

• 70% of businesses on the market don’t sell

• Only 30% of family-owned businesses transition to the second generation

• A mere 12% of those survive to the third generation

Owner Readiness Equals Successful Succession

Survey data show that 49% of business owners planning to transition have no formal plan to do so. Yet the main factor contributing to unsuccessful business succession is insufficient planning. Even if you're not planning to exit soon, preparation pays. With so much private capital searching for deals, you could receive an unsolicited offer. Should that opportunity arise, you need to be ready to move quickly. So it makes sense to improve your readiness no matter your timeline.

Assess Your Personal Readiness

A successful business transition meets your emotional, financial and lifestyle needs. Complete these tasks to understand and plan for those requirements:

• 1.    Explore how leaving the business will affect your identity and self-image.

• 2.    Establish clear goals and objectives for your post-succession life.

• 3.    Articulate your passions outside of business.

• 4.    Talk with family members and partners to make sure you’re on the same page.

• 5.    Make an honest assessment of your risk-sensitivity and that of your family/life partner

• 6.    Assess your personal financial readiness, especially if you have high-income needs:

  • Income requirements post-succession

  • Needs versus wants

  • Alignment between financial and personal plans

  • Tax planning

Ensure Business Readiness

Use this readiness checklist to set your business up for a successful transition:

•  Study up on the transition process and discuss your thoughts with your family.

• Define your personal, financial and business goals to make sure they align and that dependencies are noted.

• Form a transition advisory team, including financial and tax experts, legal counsel and other advisors.

• Create a contingency plan that includes buy-sell instructions, appropriate insurance and directives in case you can no longer operate the business. Ideally, this document should have been created when you formed the business and updated to reflect changes in lifestyle or other status.

• Review the contingency plan with advisors and family members.

• Complete a strategic analysis and formal business valuation.

• Examine the pros and cons of the eight exit options and deal structures against your goals and objectives:

  1.    Intergenerational transfer

  2.    Strategic buyer known to you (a competitor or a partner)

  3.    Management buyout

  4.    Employee stock ownership plan

  5.    Sale on the market to a third-party

  6.    Recapitalization

  7.    Initial public offering

  8.    Orderly liquidation

• Draft a formal transition plan.

• Design a post-business/life-after plan to ensure you have what you need to live the life you want.

• Launch a pre-transition value enhancement program and do preliminary due diligence to de-risk the enterprise, maximize value, minimize transition-related taxes and improve profitability.

• Initiate a management program to ensure post-transition leadership can operate the business without you at the helm.

• Perform net proceeds and taxation analyses.

• Understand the tangible and intangible factors that impact succession success, including EBITDA historical versus projected versus add-backs and conflicts among owners or partners.

• Evaluate the kinds of capital:

  • Human capital: Employees, owners, management team, strategic partners 

  • Structural capital: Processes, technology and facilities that have market values 

  • Social capital: Your brand, how you do business and your reputation in the marketplace

  • Customer capital: The strength and depth of your customer relationships, the contracts you have in place and each customer’s transferability

As you see, there’s a lot to consider when transferring your business to another owner. These lists provide a preliminary framework for your thought process around succession. Use them to prepare for more formal talks with family and professional stakeholders and advisors.

If you don’t have a wealth or financial advisor, we’re happy to recommend trusted professionals we work with. And reach out if you need more information on legal considerations.

You can view the webinar in full below. Stay tuned and make sure to sign up for our April webinar, which will be announced in the coming weeks.