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Succession Planning for Retirees
Written by Sean Wolrige, LINK Corporate Business Broker
Retiring from your business which you have built up for many years can not only be an emotional milestone but also a financial and legal challenge. Getting it right is important for your future well being in retirement as well as the continuation and growth of your business.
Recently I came across some statistics that showed that 31% of all small business owners are aged over 50. Additionally, in another survey, it confirmed that 40% of small business owners surveyed indicated they planned to sell their business in the next 5 years.
Many practices we see do not have adequate superannuation and face a bleak retirement if they cannot access the value they have built in their business.
Indeed a lot of professionals think there is little goodwill value in their business as the value revolves around the owner and, hence, do not, consider it an asset and not worth building.
I think this could largely be true in certain circumstances i.e. a 1 man operation and a business with no structured processes, little profitability and being in a remote area.
Equally, a profitable, well systemised growing business with a good diverse client base, that is well located and possesses a good team is worth value to sell, I’m sure you wouldn’t just give it away for nothing.
The business can indeed be a very good asset to sell, after all, you as owners have spent many years in hard work developing it to this stage. So to extract maximum value, an owner, needs to lay down plans well in advance generally 2 years or more.
Psychologically handling the transition out of the business for the owner also isn’t easy as there are fears, doubts about the prospect of withdrawing and uncertainty of just how to do it, which can be quite a considerable issue.
Equally, stay on too long and self sabotage can set in and your asset can diminish in value very quickly.
However, you can be reassured it can be made a lot simpler, reassuring, and satisfying with a well planned succession plan.
What is succession planning?
We see this as the early transfer of both management and control of a business, which may not mean a complete exit.
It may well mean the sale of the business outright or the owner/partner retaining equity and receiving profits after withdrawing from management.
However, in essence it is a focus on redundancy for the right reason.
The key is firstly to strengthen the business in terms of sustained profitability and asset building built on a platform of solid systems, quality client base and a high performing team.
There are a number of different options when it comes to succession planning. They could include:
- Sell the business - consider a logically planned process?
- Manage a team buy in, perhaps phased – is the team competent?
- Family succession – is the skills and enthusiasm appropriate?
- Merge - are the values, attitudes and ethics similar or complimentary?
- Close the business and sell off the assets – consider a structured plan?
Clearly if we are to maximize the value we should consider: having a clearly articulated exit strategy that firstly embraces as to when you want to exit; taxation and financing issues have to be addressed; development of successors; and essentially having the business in a strong saleable shape.
Sound succession planning can be considered in 5 steps:
- Assess the current business in detail and obtain an appropriate valuation and also consider including shareholder and employment agreements for current directors and owners, keyman insurance and an assessment of risk management issues etc.
- Develop comfortable time frames to exit and where appropriate heads of agreement.
- Build a strong strategic plan to enhance ultimate value, build current profitability and have an early foray into a enjoyable lifestyle change (e.g. only work 4 days a week perhaps)
- Consider a strong team of advisers: lawyers, accountants, financial planners, insurance brokers, and a solid business development coach. This is to cover all the legal, financial, tax, insurance and business development matters.
- Implement the plan, as obvious as this seems, it is critically important that the succession plan be managed whilst the owner continues to work in the business.
In summary, a succession plan will enable the business owner to extract maximum value and needs to be laid down well in advance of retirement generally 2 years or more.