As more businesses are put on the market in the coming years, having a well-defined exit plan is critical in order to reap the rewards of owning and growing your business. Done properly, an exit plan will guide you and your successors through the transition smoothly and help you get the highest possible price for your business.
"Business owners are seeing that there is a lot of competition when they go to sell the companies they've worked so hard to build," says Wilma Braat, a Senior Vice President and Director for MNP Corporate Finance Inc. in Calgary. "They are giving themselves a competitive edge in what is going to be a bit of a buyer's market by engaging in planning with a range of professionals."
By sitting down with your advisors at least two years, but preferably longer before you plan to transition out of the business, you can:
- Control how and when you will exit the business
- Attract both strategic and financial buyers
- Find ways to increase the profitability of your company; every dollar of extra profits could equal three dollars of extra proceeds
- Minimize, defer or eliminate capital gain taxes
- Reduce stress and family discord
Build a strong team
"People often don't realize that succession planning is not simply a matter of deciding when you're going to sell the business or who you're going to transition it to," says Brett Franklin, a Senior Vice President and Director for MNP Corporate Finance Inc. in Winnipeg. "That's very important, but a strong succession plan involves much more than that."
Through the exit planning process, business owners can ensure that their company has everything savvy buyers want to see. Demonstrating profitability is important but buyers have numerous other requirements, including strong management at the top and support levels.
"Companies that have strong management teams in place are more attractive to buyers than those that don't ," says Wilma. If this team isn't in place, a transition plan for turning your role over to new management should be part of your succession planning. "Whether you're selling to insiders or outsiders, a defined transition plan is by far the most valuable document you can offer buyers. Most of the goodwill you receive for your company is derived from the management team."
The key is to formulate a transition plan on paper, not in your mind, by following these steps:
- Identify the top three to five categories in your management role
- Detail every major task in each category
- Create a timeline for delegating the tasks
- Decide who you are going to mentor to take over each task
Every three months, see if the plan is being followed or if it needs updating. You'll know you're successful if you find that you can take more time off without worrying about the business.
"If, after two years, you still cannot take a three-week vacation without worrying about the business, you have not delegated enough," says Wilma. The higher the level of owner involvement in the business, the lower the value. "Buyers will pay less goodwill and they'll want you to remain involved in the business for a longer period of time after you sell it," Wilma explains.
Brett adds that a strong management team is not only essential for the ongoing success of the business, but it also introduces a whole new type of buyer to the process.
"A solid management team is essential for financial buyers such as private equity funds, as they do not have the expertise to run the business going forward like a strategic buyer would," says Brett. "This gives the owner more options as to potential buyers which can translate into a better purchase price for the business."
When succession planning is done in advance of the actual transition period, owners have the opportunity to evaluate their operation and look at ways to reduce enterprise risk and increase profitability which inflates the value. "After analysis, we often find that there are relatively simple ways for owners to significantly reduce the risk of a business failing or running into problems, which in most situations also translates into increased profitability," says Brett.
For example, businesses that depend on just one industry, have one client that accounts for more than 20 per cent of their business or are very cyclical, are often perceived as too risky for a buyer to pay top dollar for. That's why taking action on such issues today will make the business more attractive and valuable tomorrow.
Similarly, owners can plan to create a defendable market niche to make their operations more appealing to buyers. "It's very important that, if your company disappeared tomorrow, your competitors would not be able to take your business within a few days," says Wilma. MNP team members brainstorm with clients during exit planning sessions to develop innovative ways of securing market niches. Options include improving the loyalty of your customer base, finding a great location, delivering a service few others provide, or something entirely novel and creative you may never have considered before.
Ultimately, an exit plan asks and answers all the business, personal, financial, legal and tax questions involved with selling or transitioning your business. Creating one early and reviewing it annually to keep up with changing stakeholder objectives, business fundamentals, laws and your personal situation will help you attract buyers and get the best possible price in the future.
Think About It
An important element of the exit plan is a well-thought-out contingency plan to deal with the death or disability of the business owner. This document gives the business owner's heirs and estate written instructions and guidance on what to do with the business should the unexpected occur.
"It puts transitional mechanisms in place to protect the value of the company in the case of an early exit, when the owner cannot be there," says Wilma. Mechanisms include business insurance, a key person, buy-out insurance and bonuses to encourage key employees to stay.
A contingency plan designates successors to run the business as well as professional advisors to ensure the plan is properly executed according to the owner's wishes. Integrated with a will and estate plan, this document minimizes stress and reduces the burden placed on family and employees during a difficult time.
More Ways to Build Value
- Make sure you have accurate financial statements and a good bookkeeper. Potential buyers may be scared off if they have to wait several months for up-to-date financial statements.
- Establish a vision for the future and document it in a strategic plan. Buyers like to see that the management team or leader knows where the business is headed and how to get there.
- Improve what you can. Stay on top of technology, update your web site and have strong human resource policies that keep employees motivated.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.