Succession planning for dummies

Why is advance succession planning so important?

An ageing population combined with the dynamic of younger generations who seem less motivated to acquire a business tests long held assumptions that our businesses will be our future superannuation.

SMEs need to focus on extracting the capital value of their business and with an increasing number of those businesses expected to come onto the market in the next few years we can expect the polarisation between the good and the bad to grow.

Good businesses will continue to sell and command a high price, whereas poor performing businesses will at best come under greater price pressure and at worst be unsaleable.

The ideal timetable for an effective succession plan is three to five years from initial plan through to final succession. In a perfect world we’d recommend a minimum of two years to prepare and in a sense groom the business for sale.

Grooming the business is essential in maximising business value and the capital you eventually extract from your business.

You essentially have four options:

  1. Sale of the business
  2. Generational succession – i.e. sell to a family member
  3. A management or employee buyout
  4. A structured liquidation of the business assets

Considering your potential buyers and identifying the most likely ones can be increasingly useful in determining your likely succession plan.

  • Possible buyers include:
  • Family members
  • A competitor
  • A supplier
  • A business in a similar market
  • An employee
  • Somebody going into business for the first time

A clear succession process provides a structured plan, enhances efficiency, assists in delegation of key elements and provides for greater certainty of a successful outcome.

Key steps include:

  1. Meeting with essential advisors
  2. Choosing the most appropriate succession option
  3. Diagnosing the business by considering an internal due diligence of both financial and non financial matters
  4. Completing a valuation
  5. Agreeing on a succession timetable
  6. Developing and documenting the structured succession plan
  7. Taking the business to market
  8. Filtering enquiries
  9. Completing the sale agreement
  10. Completing settlement

Dealing with post settlement matters

Your accounting team is a key part of the succession planning process.  The skills they can bring to the due diligence, valuation, business preparation and in fact the entire succession planning process cannot be underestimated.  Their expert advice and assistance can add significant value to the eventual business realisation.

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