The Importance of Succession Planning
Many of our clients ask us when they should start their succession planning. Our answer should come as no surprise. If you own a business, succession planning should be started as soon as possible. If you can spend time early on planning your exit, you will likely receive far more value when it comes time to sell.
What is Succession Planning?
The term succession planning refers to identifying and developing talent within or from outside of your organization and identifying those individuals to move into leadership roles. As you can imagine, this is not something that you can immediately enact. Instead, it takes a careful and thoughtful preparation process that can take a year or more. It’s typically a 3–5-year timeline if you are looking to maximize the value of your company.
During this time, be on the lookout for issues that can be resolved. In addition to preparing your staff, you’ll also want to work on improving your HR department. Through this means, you are not only improving your employee performance, you are also restructuring your business for a successful sale.
Finding a Successor
Your successor at your business is perhaps the most important individual, as your buyer will look to this person for assistance and guidance. Often you will be able to find a trusted employee who is the right fit for this role. On other occasions, the successor is an outside party or a family member.
You’ll also want to go beyond identifying this successor. You’ll also want to verify their abilities. Even if you have chosen an individual from inside your company, you’ll want to make sure they have all the necessary knowledge.
We recommend taking a personality profile. When you evaluate this profile, you will be able to determine what their weaknesses might be. Once identified, you can look to put measures in place to counteract them. If you have 3-5 years for your succession plan, you can always switch course if this person isn’t working out.
Keep in mind that if you have chosen an outside successor, be sure they fit into your company culture. Culture is something your buyers will be reviewing when they make their purchasing decisions. Choosing an individual who doesn’t fit into your company culture can also cause unwanted friction within the company.
Your Company Valuation
When it comes time to get a professional valuation, you’ll want an experienced M&A advisor who has in-depth knowledge of the market forces that impact the selling price of your business. An experienced business valuation specialist will not only have the financial background, but also will look beyond the financials and at the goodwill of your business. Labor shortages are currently running rampant, and so a well-trained workforce is key to maximize the selling price of your business.
If your business has a firm structure in place, that will be of tremendous value to your buyer. Also recommended are internal processes for improvements. After all, your buyers will want to be able to own and operate the business from day one and will not want to be overwhelmed with small details. If everything is running smoothly when they come onboard, they see far more value in your company.
Bob Wolter is Mergers & Acquisitions Advisor of Creative Business Services/CBS-Global.
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