How to plan for a transition in business ownership
A succession plan, lays out how you see the business transitioning, to whom, and the necessary steps along the way to make this happen. This needs to be flexible – you want to keep potential options open – without undermining the underlying process.
This is particularly important in the case of SMEs, which can often be highly dependent on founder knowledge, personal relationships, and the expertise of the management team. A prospective buyer needs to feel secure that the value inherent in the business doesn’t walk out of the door along with the founders and senior management team.
Planning considerations
The plan needs to accommodate how the seller will exit the business, post-sale. They will need to strike a balance between drawing on the knowledge of the seller and the timing of them leaving the business, plus whether the seller retains an equity stake while deferred consideration is outstanding. If so, you will need to draw up a shareholders’ agreement, determining this relationship during the transition period.
Things to consider:
- Setting your goals, and the necessary milestones to achieve these, both before and after the transition
- Successor selection and training
- Preferred exit route(s)
- Options to buy out the controlling interest of partners or shareholders upon their retirement
- Timelines for the transition
- Determine key positions, not just the CEO. You need to identify a good leadership team, or teams, and understand what makes them good
- Conflict resolution: existing stakeholders can often feel unsettled or dissatisfied by a transition, and you need to have a process whereby these issues can be addressed
- Tax and legal implications of different succession options
- Communications plan, so that all stakeholders feel they have the information they need
- Contingency plan. Always have at least a plan B
Valuing the business
Another factor of importance is the valuation of the business. Valuation estimations tend to vary dependent on advice received, the valuation of a SME business can be very contentious. Valuation is something that will typically be undertaken by a corporate finance adviser, audit firm or specialist provider, and there are a number of ways that this can be done:
- Income valuation: Based on an analysis of past earnings, on which future earnings are projected, factoring in future cash flows and capitalisation to determine a present or future value of the business.
- Net asset valuation: This is a balance sheet analysis, calculating the stated assets and subtracting the liabilities.
Market valuation: As you’d expect from the term, this looks at what similar businesses have sold for, allowing for differences in size, customer base and the like.
