When Should Succession Planning Begin?Don Shaughnessy
There is no definitive answer. For some it begins before children are born. For others it is a last minute thing. For more still, it never happens. Does it matter? Likely. Because, there will be a succession of every business. No one has yet lived forever. Not everyone wants to run a business forever. Some businesses just evaporate.
Excluding evaporation, which can be a valid choice, there are several possible successions. Selling to strangers is usually the easiest. All of it or merely part? Small part or controlling part? The ideas and methods surrounding selling to strangers are immensely different from the ones where the transition is to a family member. Selling to an employee or employee group is different again.
Good planning will enhance value in a sale to strangers. Good planning will improve security in a sale in the family. Good planning provides for ways to deal with implicit conflicts and it avoids the creation of new conflicts.
For any moderately complicated business, the time required to optimize value, train the people who will provide the security and deal with conflicting views and conditions is about five years. The question is when to begin?
The answer to that is obvious. Begin now.
For example, why would you not begin to optimize value now. Structure matters. An operating business with real estate assets is worth less than the same business without the real estate assets but with a solid long-term lease and perhaps an option to buy. In the beginning the scare resource is capital. People do not want to use that for assets that are earning 8% or so. A holding company helps. It helps in more ways than just value of the operating business.
Developing customers, avoiding the dominant customer problem, developing worthy suppliers and building brands all add value but may not be part of the day-to-day firefighting.
Similarly, training people cannot provide bad value.
Be especially careful to plan for a method to transfer your special skills and unique knowledge. You know people and their idiosyncrasies better than anyone else in the business. Someday the new owners will need to know those things too and they will have to learn from scratch unless you provide a way. I had a client write down the name of anyone he met with, telephoned, emailed, or texted in respect to the business. Name, contact information, why he was important or useful, what particular personal data was relevant. In less than a year there was more than 700 pages. According to the son who was taking the business over, and who had worked there for several years, “I had no idea about at least half of those people.”
Internal family issues will arise but you can allay many of the fears with good communication and a long enough time.
If you leave it too long, nothing good will come of it. The death of an unprepared founder will drop the business value by a large percentage. Urgency of sale has never produced an increase in value. Anyone who has the money to buy, the expertise to operate and the inclination to act quickly, is too smart to pay full price.
Estate sale means bargain.
The last easy preparation is to own adequate life insurance. It will cushion the blow of a premature death and it will provide valuable estate options when the succession plan works out as you had hoped.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.