Why is Succession Planning so Critical?

Succession planning is a subject I hear often through my discussions with colleagues and dealers, because let’s face it, we baby boomers aren’t getting any younger.  If you are like me and have been around this industry for 30 some odd years, retirement is probably on your mind, but how do we go about it? Here’s what to do.

The Canada Business (www.canadabusiness.ca) web site is full of information on this subject and as they say most succinctly “Succession planning is about finding the right strategy for handing over or selling your business to someone else, whether it be staff, family, friend or entrepreneur and being prepared for all that transfer entails”.

A good succession plan will help make the transfer of your business go smoothly and in the process will:

  1. Protect the legacy of your business
  2. Maintain your company’s place in the community
  3. Build value for your business
  4. Provide financial security for you and your family
  5. Deal with unexpected events
  6. Prepare for the future

Whether retirement is on the immediate horizon or a ways down the road, it is important to have a succession strategy mapped out so you have a confident direction for the future.  I could write volumes about this subject but, for the purposes of this article, I want to focus on two key areas.

Preparing Your Financial Footprint:  When preparing your succession plan, you want to present the best picture possible to prospective buyers.  This starts with understanding how your company has performed over the last 5 years well beyond just the annual bottom line profit or loss.  The things you need to consider and be prepared to incorporate into your succession plan are:

  • The business trend of your company over the last 5 years
  • Understanding the key ratios and percentages of your financial performance, how they relate to the industry and what they mean to prospective buyers
  • Capitalization and net worth
  • Credit status and reputation

These factors all speak to the potential that your company offers to a prospective buyer.  Your goal is to present a picture of your company that provides opportunity and future growth potential with a return on investment that inspires buyers. If there are certain aspects of your business that don’t present well such as return on investment, inventory turns or working capital to name a few, this is the time to make changes.  Remember, your motivations for operating your business may differ from those of a succession plan, so it is important to complete a financial performance analysis and address any areas of concern for the future.

Company Valuation:  You have probably heard the expression “due diligence”.  This is the process corporations go through during the acquisition of a company to establish the validity of the company records and valuation that the business presents.  This process is not just reserved for large corporations.  Regardless of the size of the business you need to establish a value for your company and be prepared to back it up.  Things you should consider are:

  • Market trade area and future potential
  • Company equity
  • Good Will valuation
  • Inventory valuation
  • Staffing
  • Debt
  • Building and property assessment
  • Ecological considerations
  • Government regulations
  • OEM relations and agreements

Succession planning is like selling your home.  You want to present it in the best way possible.  Ideally you want the transition to take place during a seller’s market, stage your home to present it in the best way possible, know what to expect during a building inspection, make all the necessary repairs, and most important, know what your home is valued at within the marketplace. 

Succession is much more that just placing a “For Sale Sign” on the front of your building.  It requires careful planning to maximize what you will realize from the sale. 

Want to learn more about succession planning?  Contact me.

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