Succession Planning for Small Business

Marie Birkbeck

Succession Planning For Small Business - a two-part series

Part I

By Marie Birkbeck

Earlier this year Roberta Ciolli of Basin Business Advisors was in town and presented a very informative workshop on succession planning for small businesses.

What is A Succession Plan? In a nutshell, a succession plan is an exit plan; a roadmap that will assist you as an owner of a small or medium-sized business as you begin to plan for ownership and management succession. Statistics show that even though 83% of business owners plan to sell their businesses within the next two to ten years, only a mere 6% have a written plan, and 29% have an unwritten plan and surprisingly enough - 65% have no plan at all!

Why should you have a Succession Plan? Whether you have just started your small business or have been operating for several years, at some point in time you will decide that you want or need to hand over your business to someone else either through sale or acquisition, and it is important to have a succession plan in place.

Having a good exit plan in place will help you to maximize your profits, put you in charge of your exit, and ensure that the business survives. At a time when baby boomers are bracing to retire in the next few years, the market will be flooded with more businesses than there are buyers, so it is suggested that you can expect to have your business on the market for a minimum of eighteen months. Lack of planning and preparation by the seller are cited as the key reasons for a delay or failure to close a sale.

In addition to aiding you in selling your business, having a contingency plan in place will help safeguard you and your business in the event that you are faced with an unexpected emergency like death, divorce, disability or departure of one partner. What does your insurance policy cover? Who will have power of attorney? How will the assets be divided without jeopardizing the business? What happens to your business if you become disabled, or what happens when one party wants to exit? Answers to all of these questions should be set out in writing and kept in a central accessible location. Consult the experts, review and update your plan on a regular basis, and keep your key stakeholders informed.

So, you have decided you want to sell. Do not wait until you are tired to put your business on the market. The last three years of your operation can be the most important in driving sales and preparing for sale. It is advisable to sell when future revenues are even or rising. Identify what it is that you want from the sale - cash, legacy, community service, future involvement or job security? There are several types of buyers for any business - family, employees, external, strategic (competitor or operator of a complementary business), community (employees or stakeholders join forces to form a cooperative or non-profit model), and lastly the Asset Sale, a quick last resort move. It is important to know the type of buyer you are targeting and that each of them comes with their own unique set of pros and cons and each requires a different approach.

As you prepare to put your business on the market, it is important to assess your current business; think of the buyer when you are selling and realize what is NOT working before a buyer tells you. Take the time to maximize cash flow in order to maximize selling price. If you deal with a lot of inventory, now is the time to sell off the products that are taking up space, even if it means selling them at heavily reduced prices.

The whole concept of preparing for a potential sale can appear overwhelming, but you don’t have to do it alone! Help is just a phone call away. Consult with a trusted, neutral sounding board such as Basin Business Advisors as an example, discuss your tax options and concerns with your accountant, review your shareholder agreements and your purchase/sales agreements with your lawyer.

In part two we will cover how to prepare your business for sale including valuing and marketing. For more information on this and other services Basin Business Advisors offer call 1-855-510-2227.

 

Part 2

In Part 1 of our Succession Planning report (Oct. 19 issue) we covered what a succession plan is and why it is important to have one. We now move on to preparing your business for sale, including valuing and marketing it. Space limitations have necessitated dividing the remainder of the report into two segments. The final segment will be published in a following issue.

Preparing your business for sale
Now that you have decided to take the big step and pass your business on to new owners, there are several steps you need to take to prepare your business for the transition.  
Good documentation is of the utmost importance to both buyer and seller. Start now to create a folder containing the following: A copy of a minimum of three to five years detailed and reliable financials, your Marketing Plan, Business Plan, supplier agreements, customer service agreements, financial commitments, loans and notes payable, employee job descriptions, and up to date equipment maintenance schedules. Your folder should also include a detailed equipment and asset list with fair market values for each item.
Keep your key stakeholders informed of the progress of the pending transaction.
Ask yourself, “Can the business operate without me, or am I the business?” During the workshop one person shared that she was an employee in a thriving business. Customers were beating down the door to buy the product and support the business. The employee eventually moved on to other ventures and it was not long before the business was struggling and eventually shut its doors. It turns out that those that followed in her position could not replicate the personality and the welcoming atmosphere that had made the business so popular.
First impressions count! Keep your premises as neat and clean as possible. The next person to walk through your doors could be a potential buyer.
Think turn key. Could a new owner start operating immediately with no disruption?

Valuing your business  
There are three different methods for setting a selling price for your business. With the Income Method, value of the business is determined based on its ability to generate a desired economic benefit to the owner, while the Asset Approach determines the value of the business based on the fair market value of the property, buildings, equipment and other assets. The third method, the Market Approach establishes the business value in comparison to historic sales involving similar businesses in the same or similar marketplace, but is often not applicable in smaller centers as there are fewer if any similar businesses to compare to.

Who can do a Business Valuation?
When it comes to valuing your business it is advisable to get several valuations from different sources. Some but not all realtors may be able to help, as can some, but not all accountants. Small businesses in BC can obtain a valuation and other advice and assistance from Venture Connect; contact your Basin Business Advisor (BBA) for more information. A medium-small business may want to enlist the services of a Chartered Business Valuator. Remember, there is always a chance that the selling price will be different than the asking price.  
A buyer may have to look at sources and resources for financing a purchase - self financing, family or friends, vendor financing, traditional lenders such as banks, or non-traditional lenders like Community Futures, Futurepreneur, and Women’s Enterprise Centre to name a few. Financing from traditional lenders may be available for a portion of the tangible assets, property and equipment, and they may cover intangible assets but not the cost of ongoing purchases. Intangible assets such as Good Will or Intellectual Property are rarely financeable by traditional lenders, although a non-traditional lender may consent to partial financing. On occasion, the vendor may also agree to finance a portion of the purchase. For further information on financing contact BBA.
In review, your succession plan should be a unique reflection of your organization. Review and update your succession plan regularly. This ensures you reassess your hiring needs and determine where the employees identified in the succession plan are in their development. Develop procedure manuals for essential tasks carried out by key positions. Include step-by-step guidelines.
Allow adequate time to prepare successors. The earlier they are identified, the easier it is on the individual to be advanced and on other employees within your organization who will know whether certain options are available to them.
In the final following segment we will examine marketing your business and how to avoid some of the common mistakes made when deciding to sell a business.

Final Segment

Planning to sell your business? In the last two issues we have run a detailed outline of just how to go about the process in proper order. This final section on Succession Planning (Basin Business Advisors or BBA) gives you practical guidelines on how to market your business for sale.

The topic of marketing your business is an article unto itself! In brief, sellers are advised to have their complete documentation package in order, and to prepare a sales sheet, or an Offering for Sale Brochure. Templates for these documents are available from BBA.

When it comes to marketing your business, don’t be afraid to cast a wide net to attract a broader audience. Sell the community as well as the business and help buyers understand what you have, what it is worth, and why they want it! Personally approach potential buyers, including family, friends, staff, strategic buyers, and even the competition. Utilize as many resources as you can to get the word out; your accountant, lawyer, suppliers, trade schools, and industry publications are all valuable avenues to consider when marketing your business.

Of course, do not forget the power of online marketing with its far-reaching capabilities. Some recommended sites for marketing your business in British Columbia are: https://imaginekootenay.com; http://www.businesssellcanada.com; and http://www.britishcolumbia.ca/invest/opportunties/.

Venture Connect, a subsidiary of Community Futures in B.C. also provides free listings on their website (contact BBA). The paid professionals such as Real Estate Brokers and Business Brokers are also able to help you market your business.

Once you have determined that a potential buyer is serious, you should draw up a Non Disclosure Agreement (NDA). An NDA, sometimes referred to as a Confidentiality Agreement, is a legal contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but restrict access to or by third parties. An NDA creates a confidential relationship between the parties to protect any type of confidential and proprietary information or trade secrets. Although there are many free templates available on the internet, if you have any concerns at all, it is advised that you seek the input of legal counsel.

Common Mistakes (If you fail to plan, you plan to fail!):

There are a number of common mistakes that sellers make, but many of them can be avoided by having a good succession plan in place and utilizing the resources and expertise available to you:  

Overpricing the business - enlist the services of a professional valuator to determine a fair market value.

Lack of documentation - your documentation package should contain good clean reliable financials for a minimum of three to five years, your business plan, your marketing plan, supplier agreements, customer service agreements, financial commitments, loans and notes payable, employee job description, up-to date maintenance schedules, detailed equipment and asset list.

Selling the past, and not the future.

Slowing down too soon and reluctance to take risks to improve your business; continue to invest in your business to keep it in saleable condition.  

Selling when things are bad; try to list your business when the economy is stable or on the upswing.  

Inflexibility, and unwillingness to consider all buyer types and all offers.

Skeletons in the closet; be open and honest about the condition of everything your buyer is purchasing.

Unreported income or inflated expenses.

Underestimating the length of time it may take to complete the transactions. Don’t be discouraged if it takes up to a year and a half or longer for your property to move.

This report is by no means exhaustive, but hopefully has provided you with enough information to get you started on your own succession plan.

You can also call Basin Business Advisors at 250-837-5345 and request a one-on-one meeting with Roberta when she returns to Valemount in the spring of 2018.