5 Steps to Preparing Your Business for Succession or Sale

older business owner working on laptop

5 Steps to Preparing Your Business for Succession or Sale

Planning a business succession or sale is something all business owners should do even decades before they are considering retirement.  Your business is your baby. You’ve nurtured it and poured your blood, sweat and tears into its growth. If you’re like most small business owners, running the day-to-day operations of your business has left little time to even think about creating a succession plan.

Lauren Altschuler, a Certified Exit Planning Advisor with Transitions In Business, advises against procrastinating succession planning because it takes more time and effort than you’d expect. She said, “it’s at least a year-long planning process and the sale of a business can take six months to over a year.” Lauren adds, “be prepared for it to be the most planful process of your life.”

Lauren recommends the following five steps to help plan for succession or sale:

Get a Business Valuation

Talk to an M&A Advisor who understands the current market climate, works regularly with buyers and sellers and can help you assess the market value of your business. This will include any property you own or capital equipment you use for/in your business.

M&A advisors have a pretty good idea about how much buyers would be willing to pay for a business based on  their evaluation criteria. She said, “buyers look for multiples of cash flow to cover debt, their salary and a decent return on their investment.”  The numbers have to work or the buyer will walk away.  Having an understanding of the market value of your business will provide a benchmark for improvement and help you decide if now is the right time to go to market.

Clean up Financial Statements

Another aspect of business succession planning is putting your financial affairs in order. If you don’t already have one, hiring a bookkeeper, controller or fractional CFO consultant, like Integrated Consulting Services in Minnesota, can help you clean up your balance sheet and income (P&L) statement.

Most buyers will want to look at the last three to five years of your company’s cash flow. Ensure you remove any personal expenses off your income statement, such as insurance or salaries of nonworking family members, cars, expense accounts or other discretionary expenses.

CPAs and accountants offer a range of services, including compilations, reviews and audits. When a CPA conducts an audit, they’ll review your company’s management and provide an independent verification of your financial information. This will provide the highest level of assurance that your financial statements are in line with generally accepted accounting practices. This will signal to the due diligence teams of prospective buyers that they can trust/rely on the thoroughness and accuracy of your financial statements.

Prepare an Exit Strategy

We don’t have a crystal ball to see into the future, and we never know when a situation might arise that could derail our plans. Preparing an exit strategy now, will help in the unlikely event you find yourself faced with either one of the three “D”s that force owners to exit their business unexpectedly; divorce, disease or death. As we’ve seen in recent years, we can’t plan for a catastrophic occurrence, such as a market change,  pandemic, lawsuit or encroaching competitor with new technology.   An exit strategy is a contingency plan that can be executed if pre-determined situations arise.

What is your strategic plan to sell your ownership in the business?  Have you thought about who you might sell your ownership to?  An heir, a business partner, an employee or outside party, or would liquidation be the best option?  Would you care to retain a position on the Board or otherwise continue to be involved in the transition to the new owner(s)? If an employee is being promoted to fill your shoes, perhaps they need leadership or other training.  Your plan will ultimately influence decisions about how you run your business as well.

Make Your Business Attractive to Buyers

In the three years leading up to a sale, you’ll want to work hard on increasing revenues and profitability which will help you get the most return on your investment. A business that is attractive to buyers will present at least three years of up-trending positive cash flow, customer diversity, recurring revenue, and process and systems in place. The more you can remove yourself from the day-to-day operations of the business, the better. The less the business is reliant on you, the easier it will be for a buyer to step in and find success. The more attractive your business is to buyers, the more buyers will be at the table with higher offers, better terms, that result in a more efficient transition process.

Consider what drivers will determine how successful your business is in the future. A financial analyst or exit planning advisor that focuses on value building can help.  Should you narrow your business offerings to what is most profitable? Can you cut costs without impacting operations? Is your inventory fresh and up to date on your balance sheet?   Is the owner of the business spending too much time working in the business rather than on the business?

When you are ready to go to market, be upfront and transparent about any weaknesses the buyer’s due diligence team may find when reviewing your financial statements or you may run the risk of delaying the sale/transaction or scaring off potential buyers. If you do your own books, it is strongly recommended that you have an accountant review them for errors.  For example, Lauren recounts a seller who did not properly enter the transaction for writing old inventory off, resulting in an inflated profit on the P&L. A mistake like this can derail a deal and scare a buyer away, so you want to fix these issues before bringing the business to market.

Prepare Mentally, Financially and Strategically

By first completing the steps above, your business will be best positioned for the big day – the sales listing! Many sellers want to know the best time to sell their business. The simplest answer here is, when they least want to. Owners should sell their business when the business is running like a well-oiled engine, humming along without much effort.  That is when the business will be most attractive to buyers.

But are YOU ready? If you don’t have a post-sale plan, -or, if golfing, boating, traveling, or playing with your grandkids doesn’t make you smile, are you sure you are ready to let go? Do you know what income you need to support your standard of living into the future? Are you working with a financial planner who can help you understand if you can afford to retire and what the tax implications of a sale may be?

As you are considering passing your legacy on, you will want to build out your team of Advisors who can help you with the process. A CPA or fractional CFO will ensure your books are in order and that your business expenses are in line with your industry.  A financial planner will help you determine what you will need from the business in order to retire. A value builder or exit planning Advisor can help you prepare the business for a sale. An M&A advisor can help you with the sale process. An M&A attorney can help you navigate letters of intent and purchase agreements.

By planning ahead, business owners will save themselves, time, money and heartache, and will be in a much better position to transition successfully.