The 6 Steps Of Succession Planning (Part 2)
Strategic Issues

The 6 Steps Of Succession Planning (Part 2)

March 19, 2014

by Tony Vidler

Succession planning is about working out how to exit your business at your preferred time, in your preferred way, and hopefully at your preferred price.

Doing that successfully is quite a journey, and involves significant thought and planning, and detailed execution.  It doesn’t usually happen through sheer good luck!

In Part 1 of this two-part article we covered the first 3 steps in some detail, and Part 1 can be viewed here: http://financialadvisercoach.com/2014/03/17/the-6-steps-of-succession-planning-part-1/

To summarize though, the 6 steps of a full succession plan are:

1.  Establish the Owners Objectives

2. Understanding Where The Value Is

3.  Building & Maintaining Practice Value

4.  Creating the Sale

5.  Completing the Sale

6.  Personal Planning & Legacy Issues

Having clearly identified what your objectives as an owner are, understanding where the value components are within your business that can be managed to build and maintain the value for optimal pricing and exit is the first half of the challenge.

To active the ultimate objective of the succession plan though a sale and exit has to actually happen.

Creating the Sale

  • Buyer identification cannot be left to chance and the whims of the market.  Have you considered what type of purchaser is a natural fit for your business?  Who would stand to gain exponentially from incorporating your business into theirs?  Are you able to create a “prospective purchaser” list of candidates?  Have you considered “internal” potential purchasers as well as “external” parties?  Internal may be other (remaining) shareholders, or staff, or contracted advisers.  External might be current competitors, or simply strategic buyers (investors) looking for additional business opportunities.
  • Part of the process of identifying ideal prospective purchasers is understanding the internal issues (if any) that may need to be resolved or addressed in advance, or managed through a sale process, and then planning for those.  Internally, there may be issues to consider with remaining minority shareholders; contracted advisers or business partners, staff and employment contracts, and, any ongoing corporate commitments (leases, loans, funding agreements, etc). All can have an impact on the structure of a deal, the value of the business, and the ease of creating a sale.
  • Are there external stakeholder issues to consider? Preferred agency or platform arrangements, contractual provisions that may be triggered by substantial change in shareholding, regulatory or licensing restrictions and so on.
  • Funding considerations. Once you have begun to form a view of the optimal purchaser (internal v external; stakeholder issues or restrictions; etc) it is prudent to think through their options for how they might fund it.  Strictly speaking this is not your problem of course, but the more you understand the mechanics of making the deal happen from both sides, then the better you are placed to be able to make the deal happen in the way you’d like.
  • You need to consider what type of approach to market is most suitable.  Having identified ideal prospective purchasers, would an open and rather public contestable tender or negotiation process work for you, or would it create potential problems with your staff and customers?  Is an exclusive and highly confidential process best?  Does that require an external facilitator or broker to manage the process?  Or, are you best to use industry networks and key contacts and good old fashioned word of mouth to attract the right potential purchasers?  All have their advantages and disadvantages of course….

This step of the process is often focussed on the “consideration” aspects alone, and while the structure of the settlement of the sale is very important, the elements outlined above are just as important.  The consideration, or how people will actually pay you for your business, will typically come down to one of the following (ranked from most favorable to least desirable in my view):

  1. cash upfront (a lump sum payment if given to you)
  2. deferred compensation.  (a proportion typically paid up front, with further tranches or payments triggered by ongoing business metrics being achieved)
  3. leveraged buyouts (either from minority shareholders or staff)
  4. earnouts (you continue to work or consult to business and be paid for it, and the new owners use the business earnings to pay you out)
  5. vendor financed.  (Similar to earn outs except there is no expectation of you continuing to work inside the business, you have swapped your equity position to one of being a financier relying upon the ability of the business to repay you).
  6. buyer-of-last-resort, or guaranteed buyback arrangements with suppliers
  7. equity swaps. (Typically used in a merger situation, may involve some cash or debt obligations being attached as well.)

Completing the Sale

When it is time to begin the actual sale process you will need to be prepared with:

  • Valuations.  Preferably 2 or 3 using different methodologies
  • Confidentiality Agreement.  The Due Diligence process can be rigorous and revealing – but is no guarantee of an eventual sale.  It is vital to ensure that any information revealed during this stage is kept confidential.
  • Restraints of Trade.  Consider what protective mechanisms need to be in place to enhance the probability of completing the sale to a buyers satisfaction, from yourself as an exiting principle and also when it comes to any staff.
  • Stakeholder communications.  Key suppliers, bankers, strategic alliances, staff and customers all need to be told the right thing at the right time, and it is best to be prepared in advance with a communications plan and timetable.
  • Transition timetable. Transferring ownership and management seamlessly is never an overnight task, but a smooth transition can be managed if all the steps have been anticipated and planned for in advance.
  • Finalizing the financials.  Upon handover ensure that the financial statements are finalized, and all legal agreements required to ensure transfer of liabilities, deeds of guarantee and future asset ownership are in place and completed.
  • finally, consider including a buy-back provision in the Sale & Purchase Agreement.  In the event that for whatever reason the new owner fumbles the ball, or defaults on payment schedules, or breaches their obligations…consider what might trigger a buy-back provision, and on what terms.
  • …then, settle the deal.

Personal Planning and Legacy Issues

At this point it is finally all about you!  Of course you will have prepared for this if you have been diligently creating the perfect succession plan, although it is surprising how many professionals get to this point and only then begin thinking about how to structure their own affairs.

Minimum considerations should include:

  • A personal retirement plan (if not a full personal financial plan, which would be much better).  Have a clear plan as to how much of the business sale proceeds need to be parked away for your own future – for most of us there will only be so many times we can build a business and sell it for a decent sum.  Don’t blow it.
  • Check that all commercial personal guarantees and obligations are removed or exhausted. Despite being covered in the Sale & Purchase Agreement, it pays to follow through and make sure any parties holding interests or guarantees have released you personally.  Don’t leave it to chance or think the sale agreement provides absolute protection.
  • Review & Update key estate planning documents.  Wills, powers of attorney (especially any limited POA’s that might have been made in favor of a business partner), trust deeds….all should be reviewed.  This is the area where professional advice and attention can provide the best chance that you get to keep and use the sale proceeds the way you want.  It is worth the money getting good advice in this area.
  • Taxation planning.  Deliberately placed after the personal retirement planning and the estate planning review as it is more important to get the strategic decisions right first, before moving to what is essentially a tactical area.  At this point if all has gone well you will have an estate that can create some additional taxation considerations, and an investment portfolio that will have tax implications as well, so it is prudent to manage the taxation position holistically.

As you can see, putting together the optimal exit from your business can take as much thought and preparation as the building of the business itself.  Of course a business owner doesn’t have to go to all this trouble – and most don’t.  Most go for a simple rule of thumb valuation that is typically accepted within their particular sector of the profession and go for little more than an asset sale.

The difference between doing that and working to a full succession plan where you sell a well structured business that is attractive to new investors can be, and usually is, many extra zero’s.  In your pocket.

Who said hard work doesn’t pay?

© 2013 Tony Vidler.  All rights reserved.
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