Most business owners defer any formal approach to succession planning.
So it is always great to see the owner finally put pen to paper or better still, engage a professional person to help them bring their succession plans to life. But tragically, it may already be too late for the most critical step.
That is because, all too often, there is not much of value to transition.
The motivation to act on succession plans can often be correlated with the pressure of business. Once thriving enterprises can suffer a gradual decline of relevance after decades of competition or perhaps, through a sudden paradigm change from the new world of technology and trade. The reality of declining profits can be all too real. This impacts value and that is the worst time to start putting succession plans in place.
What’s the point of discussing ‘multiples of value’ of an enterprise that makes no money? Zero times any multiple can be a very disappointing outcome!
The point is that the best succession plans are invariably associated with better financial outcomes. A thriving business offers current owners so many future options and succession planning is so much easier. Handing over a business that is thriving gives the new owner far greater opportunity and significantly lower risk.
Importantly, succession through the family, to management or to third parties is more likely to succeed where the fundamentals of the business are sound. Who wants to see the future owner fail? Especially where the new owners are your own children.
So what is this magic ingredient that so many owners forget to address?
It’s all about building the fundamental business drivers that will make the business stronger and along the way, grow the profit and enterprise value. Consultants have used a lot of fancy names to describe this but in the end, it is ultimately a strategic business plan for the business owner as a pre-step towards succession.
It should include a program for:
- Understanding and exploiting competitive advantage,
- Developing & driving simple and appropriate Key Performance Indicators for the business,
- Understanding cost/volume/profit relationships & pricing models,
- Exploring the opportunities for economies of scale,
- Implementing rigid housekeeping fundamentals,
- Understanding risks facing the business and financial assets,
- Implementing effective structures, management and reporting,
- Designing business intelligence systems that highlight issues on an exception basis,
- Reducing owner dependence,
- Developing appropriate policies and procedures,
- Driving culture and values,
- Building vision & focus, and,
- Knowing which opportunities to take.
These are the building blocks that can steer a path through the current foggy malaise and identify achievable programs to deliver a future that is compatible to a financially rewarding succession.
And the right succession plan might just be to become “investment ready”, sit back and enjoy the now performing business while throwing out gentle hooks to prospective acquirers. With all of the groundwork done, that out of the blue ‘knock on the door’ can be met with a pre-prepared script and marketing response that gets the buyer very excited.
Clearly this can take some years to deliver effectively. But we have seen it work well time and time again. Owners have come in with underperforming businesses and wanting to sell. We show them the correct path, help them steer their business, watch the profits and value grow and say … ‘well done, it’s time to sell’.
Ironically, they no longer want to sell. The business is now ‘easy to run’, no longer owner dependent and probably delivering lifestyle, wealth creation and a sense of achievement that the owner simply doesn’t want to give up. This is what they always wanted!
So, before you rush out and work out the succession of your business, have a thought about the state of the business that you intend to transition. Is it thriving? Is profit growing and value at a high point? Is it desirable? Because if it’s not, there is work that needs to be done now!