Family-owned businesses are the backbone of economies worldwide, contributing to job creation and fostering a strong sense of community. However, many family enterprises face a significant challenge: succession planning.
In Part 1, we discussed how knowing where you stand at a given point in time is critical to understanding current value. Once you understand the current value of a business, you can then prepare a plan to effect a transaction for that business. In Part 2, we will explore practical tips to guide family-owned businesses through this critical process.
Succession planning begins yesterday
It is generally understood that you should only sell your business from a point of strength. Unfortunately, that is not always possible. There are many factors over which we have little or no control such as the untimely death of an owner or even a key employee. Ideally, succession planning should begin well in advance – even decades before the actual transition is expected.
The first step: Know the true value of your business
From knowing its current value, a plan can be developed to improve upon that value. To do so requires a candid evaluation of the business. Valuing your business should not be complicated
There are many textbooks and learned scholars who will propose any number of methodologies for evaluating a business and developing a plan. What we have learned from my years of experience is this: If the entry-level of your organization can not understand or relate to your conclusions, then it is way too complicated.
We strongly believe there are two elements to all valuations: Science and Art.
The science is the easy part. Any accountant worth being called an accountant can run all kinds of formulas to tell you what the discounted cash flow is, the liquidation value, or the blended value. These are just numbers that are manipulated to achieve an answer. They are based on historic data combined with assumptions about the future. As is always the case, the calculations are only as good as the data that is used in the calculations.
The art of value is critically important. The art takes into account recent activity in the market, historic transactions, and the driving consideration that is relevant above all else: Who is the potential buyer?
There are generally three types of outside buyers:
- The displaced executive
- The investor
- The strategic buyer
Learn more about these buyer profiles in this previous blog post.
Identifying and Developing Potential Successors
Identifying potential successors is a critical step. Family businesses must assess each candidate's capabilities objectively, focusing on skills, qualifications, and experience, rather than solely on familial ties. This might involve bringing in external consultants or advisors to conduct unbiased assessments. Once potential successors are identified, it's vital to provide them with appropriate training and mentorship.
Communication is key
Transparent and open communication is the cornerstone of a successful succession plan. It's essential to engage all family members involved in the business and facilitate open discussions about their aspirations, strengths, and interests. Regular family meetings and professional guidance from a Business Advisor can aid in avoiding misunderstandings and fostering a collaborative environment.
Need a trusted advisor for your family business? For a limited time we are offering a complimentary business review. That’s a great place to start. Request your business review here: https://www.capstonebusinessadvisors.com/contact-us
