Preparing Your Business for the Next Chapter

Mitchell Smith • Feb 28, 2023

Whether you are preparing to sell your business, purchasing another, or building your succession plan, planning for the next chapter of your business helps to ensure a smoother transition.

Succession planning is a critical component of any business strategy. It involves preparing for the eventual transition of ownership and leadership of a company. It can be a challenging and emotionally charged process, but it is essential for the long-term success of a business. Following is an overview of succession planning, business valuation, and preparing for the next generation of owners.

Business Succession Planning

First, let's consider the importance of succession planning. As a business owner, it can be challenging to think about giving up control of your company. However, failing to plan for the eventual transfer of ownership can have serious consequences. Without a plan in place, the business may be left in a state of flux, with unclear leadership and direction. This can lead to a loss of market share, reduced profitability, and potentially even the failure of the business.

In contrast, a well-executed succession plan can help to ensure a smooth and successful transition of ownership. It can provide clarity and direction for the business, maintain its competitive edge, and preserve the legacy of the founding owner. By planning ahead, the owner can also ensure that the business is in good hands and that their vision and values will continue to be upheld.

The process of business succession can be comprised of three basic steps:

1. Identify Your Goals

When you know your objectives, it becomes easier to develop a plan to achieve them. For instance, do you want future income from the business for you and your spouse? What level of involvement do you want in the business? Do you want to create a legacy for your family or charity? What are the values you want to ensure, perhaps as they related to your employees or community?

2. Determine Steps to Pursue Your Objectives

There are several options to keep you on track to your goals, including using buy/sell agreements, gifting shares, establishing a variety of trusts, or even creating an employee stock ownership plan if your desire is for employees to have ownership stake in the future.

3. Implement the Strategy

The execution step converts ideas into action. Once it’s implemented, you should revisit the strategy regularly to make sure it remains relevant in the face of changing circumstances, such as divorce, changes in business profitability, or the death of a stakeholder.

Keep in mind, a fundamental prerequisite to business succession is valuing your business.

Business Valuation

The second key component of succession planning is business valuation. A valuation is an essential tool for assessing the worth of a company. It provides a clear understanding of the financial health of the business, its assets, liabilities, and potential for growth. A business valuation can also be used to determine the fair market value of the business, which is critical for estate planning, tax purposes, and other financial matters.

Additionally, a business valuation is necessary when transferring ownership of the business. It can help to determine a fair price for the business, negotiate the terms of the sale, and ensure that both parties are satisfied with the outcome. By obtaining a business valuation early in the succession planning process, business owners can make informed decisions and take appropriate steps to increase the value of the company.

Choosing a Valuation Method

There are five main business valuation methods available to small business owners. These include1:

1. Adjusted Net Asset Value

The adjusted net asset is determined by subtracting liabilities from assets while using industry knowledge to adjust both metrics for current value. For example, an asset or liability may be priced lower than its original value due to market fluctuations, therefore adjusting the overall value of the business.

2. Capitalization of Cash Flow

This is determined by dividing your cash flow from your business’s rate of return. Cash flow is an amount of money that entered and exited your business within a given time.2 Your rate of return, or capitalization rate, is the earnings a buyer can expect to receive.

3. Discounted Cash Flow

Discounted cash flow refers to a complex process used to calculate the value of a business based on its potential growth.

4. Market-Based Valuation

Using this method, similar businesses who have recently been sold are examined to determine the value of your business.

5. Seller’s Discretionary Earnings

Whether you know which valuation method you want to use or not, determining a plan can make the process smoother. Some valuations can be performed on your own, however, for business owners seeking more complex methods, professional assistance may be required.

Consider contacting an advisor, appraiser, or another financial professional to help guide the process and make sure your business is given an appropriate value.

Preparing the Next Generation of Leaders

Finally, preparing for the next generation of owners is crucial for the long-term success of a business. This involves identifying and developing future leaders, providing them with the necessary training and experience, and instilling in them the values and vision of the company. It is essential to cultivate a culture of learning, growth, and innovation within the organization, so that it can continue to thrive in the future.

By investing in the next generation of owners, business owners may ensure their legacy will continue, and their business will remain relevant and competitive. This can also help to attract and retain top talent, as employees will see a clear path for career advancement within the company.

In conclusion, succession planning, business valuation, and preparing for the next generation of owners are critical components of any business strategy. They require careful planning, attention to detail, and a willingness to let go of control. However, by taking these steps, business owners can help ensure the long-term success of their company and preserve their legacy for future generations.

If you are interested in preparing your business succession plan, regardless of your career stage, our Team stands ready to assist. Contact us today to learn more.

< Older Post Newer Post >