Succession Planning for Beginners
What would happen to your business if you were no longer there to do what you do? If that’s a question that’s sitting on your backburner, or hasn’t even yet occurred to you, I’d like to encourage you to bring it to the boil – like right NOW.
Think differently, think now
For business owners, succession planning is not just about ensuring that your business is able to continue after you leave, it’s very much intertwined with your own personal planning for your long-term security.
When you are in the thick of building a young enterprise and dealing with the everyday challenges that presents, it can seem like it’s something that can wait till later when the business looks more like the solid success you are working towards. But this is where a change of mindset can really benefit you in the present as well as in the future.
One of the great things about starting on a succession plan sooner rather than later is that it encourages you to think differently about your entire growth strategy.
The fact is, if you wait to think about this until you’re already feeling ready to throw in the towel and head off into the sunset it’s not just that you and/or your family will lose out on whatever your eventual exit scenario involves, you may well be losing out now too.
Great succession planning involves working on the value of your business as a transferable asset. Get your head around it now and you’ll make better decisions about how you view your business and how you grow it.
The results will be better for you and all involved in the enterprise long before you hang up your hat. And that’s why it will also be a far better proposition for whoever eventually steps into your shoes.
You may not yet be ready to decide whether you will pass on what you have built to a family member, a partner or colleague or sell it on to someone else entirely – in fact selling it might never have occurred to you at all.
Who you eventually select as the right candidate is a complex decision but whoever it is, considering the key areas that will make your business valuable as a saleable going concern that can function without you – even if you have no intention of selling in the near future – can place an entirely new complexion on how you approach even your earliest process of growth.
Let’s look at the main elements that create value for a buyer or heir:
To be worth money your business needs to be demonstrably stable. Many growing businesses skimp on how much they are prepared to spend on bookkeeping, accountancy and legal services.
These professional services are valuable in themselves in that they keep you clear on what you are doing and reduce the risk of unexpected expenses or troubles with compliance.
Your contracts and financial records are also the first thing a potential buyer will want to see in order to assess your stability and make a valuation. So cheer up about paying for the dull stuff, it’s worth it.
PROOF & PREDICTABILITY
Businesses are valued in terms of the revenue they can reliably be predicted to produce and sustain and the best indicators of that are ongoing contracted relationships and evidence of repeat business.
Look at your services and your business model. Are you too focused on big contract wins and neglecting recurring revenue?
Whatever you do, look at ways to create reliable ongoing income from the customers you have already won. Maintenance contracts, annual reviews, loyalty schemes and referral commissions all contribute to being able to show proven reliable income that’s built into the business model and visible on the balance sheet year by year.
BROADEN YOUR HORIZONS
Make sure all your eggs are not in the same basket. Aim to diversify your client and supplier bases. You need to have products and services that are not totally dependent on strong personal relationships. Build elements into your product or service offering that can be performed by less senior staff without much management. Not only are these attractive to potential buyers and more sustainable when you or another key person steps away, but in the here and now these smaller offerings are a great way of bringing in new clients and developing reliable revenue streams.
You should also try to ensure you are not too dependent on particular suppliers for too much of what you do. Build solid and loyal relationships sure, but keep a keen eye on how you would manage a change to an alternative should it become necessary
PROFIT & CASHFLOW
Obviously, the money that your business is making is a lynchpin of any valuation. To realise its best value, at the point where you and your business part company it should be able to demonstrate at least three years of at least 25% profitability.
Build a solid cash buffer and put in place good credit control backed up by sound terms and conditions whenever you begin new work. It’s easier to be more disciplined about what you draw out of the business if you have your eye on its potential sale value.
It’s very easy for a growing business to completely revolve around its owner(s). The first people you are likely to hire are support staff with the express purpose of freeing you yourself up to concentrate more on building relationships with clients who like to feel they have the attention of the top person. The business is in any case likely to be built around your skills and expertise.
There comes a point though when it’s important to put some emphasis on developing other leaders through both recruitment and training and how you do this is vital to creating the value that an eventual successor will need and want. There are few better reasons for making sure that your approach to your HR management goes beyond just administration and that you take employee development and company culture seriously.
Sound HR practices, policies and procedures, well-structured and documented remuneration and incentive schemes and a demonstrably strong staff retention record are also important indicators of a healthy business that will appeal to a potential buyer.
In simple terms, has your business got the people to thrive without you? Do you delegate, empower, mentor and encourage employees to expand their skills and experience?
In the short term, for your own benefit, work towards a secure feeling that if you were off the scene for a month for some reason, everything would be fine. And if that’s not the case then you need to look carefully at why not.
Our sister company Tiger HR can assist you in developing an affordable and appropriate HR strategy and implementing good practices.
If you are in partnership with someone else or your business has multiple owners it’s essential that your agreements include plans and procedures for succession.
You should both/all have wills which deal with the succession of the business as well as how shares will be dealt with on death, whether that’s leaving them to family or ensuring your surviving owner retains control. You should also consider putting in place Lasting Powers of Attorney that enables the busines to operate seamlessly in the event of a decision-maker becoming incapacitated temporarily or permanently is also highly desirable.
It’s a complex area and one which definitely requires professional legal advice to make sure that you and your respective families are all protected from what can amount to chaos and a lot of personal distress if anything happens to one of you. You should also have contractually-reinforced exit plans in place if anyone chooses to depart.
With my litigation background I can’t help but bang my drum for proper, legally binding contractual relationships between business partners anyway. Your partner might have lovely kids but ending up in a business partnership with them might not be on your wish-list. It doesn’t matter whether it’s your best friend, your sister or your offspring. Get it put down on paper clearly and precisely. It’s the way to maintain happy relationships and prevent heartbreaking disputes – trust me on this.
You may or may not have plans to pass on your business to one or more family members, but if the reason for your departure from your business was death or serious illness, your loved ones will be faced with an enormously difficult situation if you have not organised a succession plan to deal with this eventuality.
Tiger Law has a great deal of expertise in advising business owners so that their personal and business succession planning complement eachother and no loose ends are left to cause unnecessary disruption and conflict among those who they love and work with in the unfortunate event of their unexpected death or incapacity.
NOBODY WANTS TO WORK FOREVER!
Lawyers like me can be a pretty jaded bunch, as a litigator and commercial solicitor I’ve seen an awful lot go much more wrong than it needed to. I’ve said it many times (and it’s written all over this website!), my whole vision for Tiger Law is to provide a different kind of law firm, one that gets to you before those bad things happen rather than hops in when it already has, swiftly followed by massive invoices.
However, when it comes to succession planning and personal planning for business owners, I want to show you that this is an item for your to-do list that is not just about worst case scenarios. It’s about thinking differently about your business and its future and making sure that you get the best possible results from all your hard work. And that can definitely be a positive and constructive thing.