It's inevitable that you will, at some point, exit your business. There are two ways that can happen, voluntarily (e.g., through a sale, retirement, or other lifestyle choices) or involuntarily. An involuntary exit could involve an untimely death, disability (business owner or family member), disenchantment, disagreement, or divorce.
"Unfortunately, an involuntary exit happens a lot more than we would hope," said Jeff. "My biggest piece of advice to owners is to plan in advance. The longer you wait, the fewer options you will have."
Economic headwinds such as high-interest rates, rising costs due to inflation and overall economic uncertainty have left many business owners unsure of the impact on their business as they think about a transaction or transition process.
“Regardless of the type of buyer, it is not unusual for an M&A process to take anywhere from 6 to 12 months or more in the current economic environment. Planning is a great way to extract maximum value during a sales process. Ultimately, these processes are a marathon, not a sprint,” said Ashwin.
A detailed succession plan is an integral part of a well-managed company. It should be an ongoing process that not only determines who should take over your company if you retire or pass on but also identifies and prepares future leaders within the organization. A successful plan involves an integrated approach to transition, including:
A succession plan should also address the business owner’s key objectives, including their legacy and future vision for business growth and development. A strategic plan will make the transition smoother for you, your family, your successor, and the business.
Assess your company in the current economy
Rising interest rates have increased the cost of transactions. It also impacts valuations, what purchasers are willing to pay and the terms under which they will buy. In the current economic environment, purchasers and lenders have increased the due diligence required to satisfy their risk appetites. Here is a short but not exhaustive list of questions for business owners to better assess their readiness for a transaction:
- How reliable is your historical and current financial information? Can financial data and reports be accessed in real-time?
- Can you easily convey the qualitative and quantitative profitability and cash flow drivers?
- What are the key sustainable competitive advantages when comparing your business to others in the same industry?
- Are there tangible growth opportunities that a potential purchaser could capture?
- Are relationships with customers and suppliers managed personally or by various team members?
- Is the management team capable of taking a more significant role, or will the company require external resources to succeed?
Assessing your company early on will assist you in identifying the key areas you’ll likely need to focus on as part of your succession planning.
Choose your successor
It's important to start thinking about who will take over your business before you're ready to retire or exit. If you don't have anyone in mind, begin by mapping out the knowledge, ability, skills, habits and experience needed for future success.
"When choosing a successor, founders and business owners tend to default to someone who looks, sounds, and acts just like them," said Jeff. "The idea being, they've been successful thus far, so they need someone with the same skills, knowledge, and attitude to continue that success."
In reality, owners should choose a successor based on the needs of their business going forward. What knowledge, skills, and habits are needed for the company to succeed in the next 10, 15 - 25 years? Where is the business in its lifecycle? Where is the industry headed? Where is the potential new owner in their lifecycle? Additionally, choosing the successor will have cascading consequences, especially if they occupy a key leadership role in the company.
Canada has seen increased private equity activity in the past few years. Private equity has emerged as a viable exit strategy for Canadian business owners. These groups typically have improved access to expertise, resources and capital allowing a business to achieve its long-term goals.
“A full divestiture process run by an M&A advisor would allow a business owner to understand all the options available for a transaction. This could include a sale to a financial buyer such as private equity, a strategic buyer or internally to the management team,” said Ashwin. “Looking at all the options will provide the peace of mind in knowing that the decision aligns with the necessary objectives.”
Mentor your successor
Once you've determined the skills needed for your business to succeed in the future, identify any knowledge gaps between what your successor has now and what they'll need going forward.
From there, develop a mentorship plan. The sooner you start, the better. Mentorship should be intentional and, by definition, takes time. It could be done before a transaction with the internal management team or post-transaction with a third-party purchaser.
"It's different from coaching. You'll be on the same side of the desk versus opposite sides. It involves the owner spending a lot of time actively speaking with and listening to the chosen successor," said Jeff.
The successor will need to understand everything about the business, including: