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Succession Planning: Create Value Before the “Great Escape”

7 Sep, 2010 By: Bob O’Hara, O’Hara & Company imageSource

Succession Planning: Create Value Before the “Great Escape”

Ask business owners about their plans for retiring from business or eventual
succession, and many will say they have enough on their plate dealing with
financial and employee issues occurring today, without devoting time and
attention to exit planning. But the reality is that from the moment a business
opens, the clock is ticking toward that ultimate transition day…and the actions
taken today to preserve and create business value, will chart the course for a
lucrative tomorrow.

The sale of a company or dealership requires a comprehensive action plan and
can take up to a decade to transpire, but with the proper measures taken and
advisers in place, this critical transaction can be conducted with minimal
stress. Ultimately, there are but five ways for owners to leave their companies:
Sell to a Third Party, Sell to a Co-Owner/Family Member, Sell to Key Employees,
Die Owning the Business or Liquidate the Company

For those in the beginning stages of an exit plan, consider that leaving your
company is a process that, if it is to be successful, requires a written plan. 
This plan should set your exit objectives – financial and otherwise – and
document how you will achieve those goals. 

No matter how skilled or experienced a business person you are, executing an
exit plan is not something that should be done solo. If you opt to go it alone,
chances are you will leave a lot on the table – in terms of money, time and
perhaps even your emotional well-being. A successful exit plan involves a number
of elements – legal, financial, tax, to name just a few. It is in your best
interest to hire an experienced team of professionals, including an attorney,
CPA and financial planner to assist you through the exit plan process.

The Exit Path

In order to select an exit path you must first identify your most important
objectives, both financial and non-financial. Internal and external
considerations impact an owner’s choice of exit. An example of an interior
consideration is the owner who wants to transfer the business for cash, but is
unwilling to place his established company and the fates of his employees to an
unknown third party; in this case he may decide that an Employee Stock Ownership
Plan or carefully-designed sale to a key employee or group of employees is most
suitable. Exterior considerations that may impact the choice of exit path
include business, market or financial conditions. If an immediate sale is not
necessary, a business owner may opt to wait it out a couple years to avoid
dealing with an anemic market.

The importance of financial statements cannot be overstated when going
through the exit plan process. Whether you intend to transfer your business to
someone within the company or sell to a third party, demonstrating financial
stability is a crucial step in establishing a successful exit. 

Financial statements provide a clearer picture of current financial position;
in effect gauging what has already been accomplished and what still needs to be
completed to create a successful exit plan. These vital statements provide cash
flow information, which is used to determine the value of your business and the
price it may be sold for – they show historic earnings, cash flow results, and
trends that have been established over the years; in effect creating an
indicator of the company’s financial future. For example, if you plan to sell
your business during the first half of 2011, you will need cash flow projections
for the remainder of that year, in addition to the years 2012 through 2015. 
Understand that these projections must be grounded in the reality of past actual
performance, rather than your rosy hopes for the future.   

Regardless of whether your exit plan revolves around an internal transfer of
ownership or sale to a third party, an independent valuation provides a solid
basis for planning. The last thing you want is to spend time and money planning
your exit, only to discover that the value of your company can not support the
exit, either financially or time-wise.  Evaluating various tax consequences is
also paramount to your choice of exit plans. This assessment will include
several factors, such as the form of business entity as well as if you will sell
the business assets or your stock in the company.

Advantage vs. Disadvantage

For company owners seeking to outright sell, there are both advantages and
disadvantages to dealing with a third party. On the plus side, if the business
is properly prepared for sale, you can get cashed out – in other words, you can
get the majority of your money at closing. Immediate cash translates into less
risk down the road. But if this important detail is not part of your sales
contract with the new owner, you will be at a disadvantage. Bottom line is, you
want to receive the bulk of the purchase price in cash at closing. Another
advantage – if the market is “hot” for your business, you may be pleasantly
surprised with receiving more cash than anticipated. As with most things, timing
is everything when selling a business.  One significant disadvantage to
selling to a third party is more emotional than monetary.  Regardless of what
the buyer says, the personality and culture of your business will undergo a
radical change. Maintaining the culture and core essence of a business is
normally best achieved by selling to someone other than an outside third party.

Building Value

Apart from who the company is sold to in the future, the need to build its value
should be a constant top priority, beginning in the embryonic stage. It’s
important from the “get go” for business owners to ask the hard questions about
their future and the potential of the business they are creating. A road map to
an eventual exit plan will provide focus and direction; it will also allow an
owner to develop plans to motivate and retain key employees in consideration for
top seats in the event that the business is transferred to the management team
or sold outright to a third party. Owners should decide early on who will run
the business if and when he/she leaves. It makes no difference if the plan is to
someday transfer ownership to the management team or sell it to a third party –
as an owner you must take measures to include those key individuals on decisions
that will affect the company’s future, and provide incentive to those essential
employees to work with you toward the goal of building business value.

For instance, the person in charge of operations should be given the
authority to set production policies and provided motivation to control costs
and develop efficiencies.  By sharing authority and decision-making
responsibilities, the owner begins to make the business capable of operating in
his/her absence.  Look at it as a simple equation. One person in charge can
create a weak link to the future as all responsibility rests with that
individual. But a business overseen by several top-notch employees has a process
in place that can better build productivity and cash flow…in addition to adding
value to the table when the time comes to sell your business.  The time
spent now to preserve and increase your company’s value will pay off later…for
both the short and the long run.

Bob O’Hara, CPA/PFS, MST, CExP, is Pres. / CEO of O’Hara & Company in MA
that addresses the comprehensive exit strategy of business owners. For info
visit www.oharaco.com or

or call 978-244-9860.

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