By Linda A. Hamilton, CPA, a member of WPO's New York I Chapter and proud sponsor of the 2023 WPO Entrepreneurial Excellence Forum
Did you know that the vast majority of business exits are unplanned?
Like love-birds tying the knot, no newlywed enters into marriage anticipating divorce, just like few entrepreneurs starting their companies do so with the vision of how they will leave it.
But just like getting hurricane insurance in Florida does not increase your risk of a hurricane hitting your home, setting yourself up for success when it comes to succession planning will make you oh-so-glad you did when the time comes to move on.
Why Succession Planning Is Urgent Now
There are MANY factors that contribute to over 50% of business owners facing an involuntary exit. These unplanned exits are generally not because a better opportunity fell into their lap.
The reasons why a business owner may exit early:
● Health Issues: If a business owner develops a serious illness or injury, they may need to exit their business.
● Burnout: Running a business can be incredibly stressful and exhausting. If a business owner experiences burnout or mental health issues, they may need to prioritize their well-being.
● Divorce or Separation: If a business owner goes through a divorce or business partner separation, they may need to sell their business to divide assets with their former partner.
● Financial and Cash Flow Struggles: If a business is struggling financially, the owner may be forced to sell the business to avoid bankruptcy or to pay off debt.
● Legal Issues: If a business owner is facing a lawsuit or other legal issues, they may need to sell their business to pay for legal fees or to settle the matter.
● Family Obligations: If a business owner has family obligations, such as caring for a sick relative or raising young children, they may need to prioritize these responsibilities.
● Market Changes: If the market changes dramatically, a business may no longer be viable or profitable.
Despite knowing that these situations can and do happen, many business leaders STILL put off the exit planning process! Why?
One reason might be the misconception that it will be easy and fast to find a buyer. According to Small Biz Trends, 75% of owners believe they can sell their business in a year or less (smallbiztrends.com/2018/02/business-exit-strategy.html). But less than 20% of businesses listed for sale actually sell at all!
As a business growth coach and Certified Exit Planner (CEPA), these statistics make me cringe.
So, what can YOU do as a business owner to better prepare yourself for what’s next after business?
1. Know Your Business Worth
Before you can sell your business, you need to know what it's worth to a potential buyer. You can do that through a formal business appraisal or through an assessment that determines the fair market value of your business based on various factors like your financial statements, assets, and liabilities. With a formal business appraisal, you'll have a clear idea of how much your business is worth, which can help you make informed decisions about your exit strategy.
Seeing your business through your eyes versus the eyes of a potential buyer could be two very different views and way too many business owners will overstate how much they could get from a sale. For example, when I work with clients I take them through a series of assessments that look at planning, revenue, operations, and profit that gives them a realistic score to find out if they are truly exit-ready. This can be helpful in doing a reverse due diligence that results in an action plan to improve your company's value.
2. Create a Succession Plan
A succession plan is a process of identifying and training potential successors who can take over your business. What happens to your employees, customers, vendors, suppliers, and contractors if you have to walk away TOMORROW? Your contingency plan can include a family member, a trusted employee, or an outside party. You’ll also want some non-competes or employment agreements in place with key team members to ensure that the team is on board with the transitions to the new owners. By putting these plans in place, you'll ensure that your business can continue to operate even if you're not there.
Let’s say you own a boutique law firm and have a team of five attorneys. One of them, Jane, has been with you for ten years and has shown a lot of potential. By creating a succession plan, you can start grooming Jane to take over the firm when you retire. This can involve giving her more responsibility, providing mentorship, and giving her access to key clients.
3. Document Your Processes
One of the biggest challenges business owners face when exiting is ensuring that their business can continue to operate without them. This is where documented processes come in. Documenting your processes involves creating a set of standard operating procedures (SOPs) that outline how your business operates.
By documenting your processes, you'll ensure that anyone who takes over your business can easily understand how things work. This can also make your business more attractive to potential buyers, as they'll have a clear idea of how it operates.
4. Clean Up Your Finances
When it comes to selling your business, nothing is more important than your finances. Buyers want to see that your business is financially stable and has a track record of success. This is why it's essential to clean up your finances before you start looking for buyers.
This can involve reviewing your financial statements, cleaning up any outstanding debts or liabilities, and addressing any financial irregularities. By presenting a clean financial picture, you'll make your business more attractive to potential buyers and increase the likelihood of a successful sale.
Let's say you own a chain of upscale spas. Before you start looking for buyers, you review your financial statements and notice that you have several outstanding debts which can decrease the value of your business. By making a plan to pay off these debts, you present a more attractive financial picture to potential buyers.
5. Build a Strong Management Team
Finally, one of the most important things you can do to prepare for an exit is to build a strong management team. This can ensure that your business continues to operate successfully, even after you're gone. It can also make your business more attractive to potential buyers, as they'll see that the company is not owner-dependent and therefore less risk for the new owner. This can involve hiring key executives, providing leadership training, and empowering your team to make decisions. By building a strong management team, you'll ensure that your business can continue to thrive, even if you're not there.
Whether you're planning to retire or sell your business, taking even ONE of these steps now can help you maximize the value of your business and ensure its long-term success. The sooner you begin planning your transition, the more control you will have over how it unfolds - for you, for your family, and for those who depend on you. Exit planning is simply a good business strategy.
About the Author
Linda A. Hamilton, CPA
Linda Hamilton is passionate about empowering female entrepreneurs. She has over 30 years of experience speaking, teaching workshops, and consulting on building profitable and resilient companies. Linda’s joy comes from seeing businesses flourish as a result of sharing and brainstorming ideas to improve the bottom line. Linda is an award-winning CPA, SYSTEMologist™, Certified Exit Planner, and business process improvement specialist. Her firm works with business owners across the globe, but she splits her time between New York City and Florida. Get free resources from Linda to build a business worth selling at GrowProfitScale.com.