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Succession planning: Is owning a business like owning a boat?

27th Jul 2005
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Ask any boat owner and they will tell you the two best days in a boat owner's life are the day the boat is bought and the day it is sold! Notwithstanding all the enjoyment that comes from owning a boat on a sunny day, there is an abundance of hard work and many days with stormy weather - all of which create risk and stress.

Owning a business is the same. The first day is a very proud moment - you have achieved a dream. On day two the slog begins. Hopefully there is more sunny sailing than stormy weather but, inevitably, for every privately owned business a day comes when it is time to sell. For many owners who have spent their working lives building their business, the sale is the anticipated money day, on which they will realise enough capital to retire or move onto another business opportunity.

The reality is that most business owners do not plan for their exit and face situations where they do not maximise the value of their business. So what are the key things that are needed to maximise the value of your business on sale?

1. Keep tidy accounts. A buyer wants to see a track record of success so accounts that have been inter-twined with personal and uncommercial (like not paying commercial salaries to the owner) can muddy the waters. Sure, a buyer can make adjustments to historical accounts but this reduces their comfort in the ability of the business to generate good earnings, and earnings drive the price achieved on sale.

2. Transfer non core assets out of the business. If you have cars, land, surplus cash, loan accounts and other 'non-earning assets' consider transferring them out of the business before putting it on the market.

3. Tax management is a long term issue. Ensure you take a long term view with tax matters and look at the overall effectiveness of your structure. Hopefully sale is the time of maximum value extraction and is when tax efficiency is needed most.

4. Get important contracts in place. The greater certainty you can provide with respect to employees, customers, suppliers and rented premises the more certain your forecasts and the greater price earnings multiple a buyer will pay. Apart from being good ongoing strategic business management, imagine the difficulty and resistance you would face telling employees, customers and suppliers that you want to sign a contract with them because you are about to sell the business.

5. Have a solid business plan. Most businesses are sold with some form of sales memorandum. This can come in many different names and styles but in essence it is the business plan and it should show the business model, the marketing plans and financial forecasts.

6. Document the 'invisible balance assets'. Most balance sheets do not list many assets of the business such as the employees, the customer base, brands, goodwill, know-how and so on. Most businesses are worth more than the asset value that sits on their balance sheet and a concise summary of these assets should help a buyer fully appreciate what the business has to offer.

7. Eliminate the 'invisible' liabilities. What contingent or unrecorded liabilities might emerge during a due diligence process? The psychological advantage you should have during the sale process is lost to the buyer if they discover the skeletons in the closet.

8. Maximise current performance. Make sure that the business is having a good year at the time of sale. Don't take on projects that will have a short term negative impact on your P&L. Look at payback periods not ROI when making investment decisions.

9. Take the owner 'out' of the business. The more the business can operate without the owner the more attractive it will be to a buyer. Taking the owner out means systemising the business, creating job descriptions and clear roles for employees and developing the capability of the team.

10. Manage Communications. Don't put your business up for sale until you are ready to sell it, and ensure you have communicated to the important stakeholders at the appropriate time. Manage expectations through regular updates rather than dealing with a rampant rumour mill.

Selling a business should be a great experience for those who have worked hard over the years but much of the preparation must take place well before the business is put up for sale. Succession planning is heavily dependent on strong and ongoing strategic management over the life of the business, not just trying to sell it at the end.

Jim McKerlie

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