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The Value of Succession Planning

Business owners generally concentrate their attention on maximizing profits in both short and long term cycles.

After some time has passed, the need to have a long-term succession plan and exit-strategy takes center stage.

At the inception of opening and running a small or medium sized business, the primary goal is establishing a sound profit generating process that can self-sustain with the right marketing and customer acquisition models. Often, looking farther down the road is deemed less important and gets lost in the growth of the organization.

However, just as a business goes through periods of change, so does business ownership. Owners travel through many phases of their journey, and some are fortunate enough to have formal timelines and financial benchmarks in place for their exit when they start. Others will see the commitment and drive needed to sustain the business running smoothly taper off as they get older.

Following are some things to consider when thinking about proper succession for your ownership, and how you can positively position your business and yourself for a smooth and financially positive result:

HAVE A VALUATION PERFORMED – Starting early, and having an objective professional perform a business valuation will give you an accurate value for your business. It will also provide the minimum price tag you would accept for a solicited or an unsolicited offer to sell.

CONSIDER ALTERNATIVE OWNERSHIP MODELS – Some businesses possess an enormous amount of intellectual property (employees, managers, etc). An example of an alternate ownership model could be an Employee Stock Ownership Plan (ESOP). This model allows current employees to incrementally own shares of the business through stock purchase, which maintains the ongoing nature of the business with little interruption. There are potential tax benefits to selective ownership models.

CONSIDER BRINING ON A PARTNER – Sometimes, bringing on a junior partner, who is equally ambitious and shares your values, is an easy way to internally groom your successor. There are several details to consider if taking this approach. It is key to make sure that your new partner has a desire to own the business. From there, you can discuss your vision and timeline, and the logistics and revenue sharing details of transferring equity.

EVENTUAL SALE OF BUSINESS – This is the situation where having a formal valuation is key in positioning yourself for a profitable sale. If you are in an industry of increasing demand, and sales of recent businesses have occurred, business owners can properly time their exit based on favorable market prices. This serves as an invaluable tool that will allow you to enjoy a profitable sale above your company’s book value.

The importance of succession planning is immeasurable. It allows for owners to properly measure and evaluate their financial and life-cycle benchmarks as they make their way through the ever changing journey of business ownership!

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