Key Steps to Succession Planning


Magnusson Balfour CEO, Scott Balfour recently sat on a panel discussion at the MaineBiz Momentum Convention in Augusta to help business owners understand and prepare for selling their business and succession planning. Here are the key topics discussed, and some helpful insights from Scott:

  1. Conduct Due Diligence on Your Own Company

When selling your business, be prepared to address prospective buyer’s questions with accuracy and authority. If you avoid doing your own due diligence, that is, to do your own comprehensive assessment of your business, you risk losing a sale.

Your business details should be as transparent as possible, and answer any questions a prospective buyer may have. Be prepared to thoroughly disclose the accounting and sales structures, personnel and IT infrastructures, and financial and marketing plans. A potential buyer naturally needs to know all this information before considering buying your business. Avoiding doing due diligence yourself prior to the sale means when it is conducted, it will be by the buyer. Consequently, you must scramble to accommodate their questions, or the deal will be terminated.

Conducting due diligence is a preventative measure that you want to do while you are in control of the sale process.

  1. The Dynamic of the Owner’s Role in Value

The owner’s role in the daily business functions has a tremendous impact on determining a business’ value. Consider the hypothetical sale of a plumbing business: both businesses have the same cash flow, same earnings, same number employees, same equipment, and both have good relationships with their customers. One has a great deal of value; one, unfortunately, has very little value. How could this be?

In one business, the owner is the key player and the hub of the business. He is the point-person for customers, and considered the expert in delivering the business services. When this owner is gone, there is not much left for infrastructure; he, essentially “is” the business. In the second business, the owner has systems in place, a self-directed employee workforce, experienced sales staff, and a modern marketing plan with online presence. When this owner is gone, it will be easy for someone to step in and take over because there are systems and people are in place that make the business successful with or without him.

Clearly, the second business presents the greatest value to a potential buyer. If you wish to have a business that you can sell for a profit at some point, it behooves you to create an infrastructure that keeps the business operations and sales independent of your own expertise.

  1. A Successful Sale Needs an Advisory Team

A successful sale of a business requires the right Advisory Team in place so that the transaction goes smoothly from preparation to the owner happily handing over the keys. Your list of professionals needs to include: Transaction Attorney, Transaction Accountant, Financial Advisor/Wealth Planner, Business Broker/Mergers & Acquisition Specialist, and a committed seller.

Your Transaction Attorney should not be the current attorney you work with for family business or day to day legal questions. You need someone who specializes in business transactions, and has proven experience advising on such matters.

Likewise, the Transaction Accountant to work with isn’t the bookkeeper or accountant who prepares your taxes. You want someone who knows how to structure business transactions for the best tax advantage on a sale of a business versus the operations of a business.

When you sell a business, it is not what you make but what you keep that counts. The right Financial Advisor is the person competent to fully help you prepare for what comes after the sale of the business, whether your plan is retirement income, investment, or new business acquisition, you want to work with someone who can develop a financial plan that meets your future needs.

Also on the team is the professional who handles the actual sale of the business. A Business Broker (Mergers & Acquisitions specialist) is more than a real estate broker, so don’t enlist your friendly, neighborhood real estate agent who helped you sell your house. An experienced Business Broker specializes in businesses versus real estate, and should have credentials for such. Business brokerage is very different than residential or even commercial real estate because it involves a different set of pricing structures, the need to fully understand business financials (as opposed to building construction), and there are different professionals involved to coordinate with.

Lastly, why a committed seller, you ask? If the owner doesn’t know what they are going to do after the sale, they are likely not committed to the process yet. A half-hearted seller will not perform all the above key steps, not set or accept a reasonable price, and is not ready to let go of the business. If you know what you are going to do – pursue another business, work for the community, spend time with family – then you are thinking beyond the business and are ready to let go. When a seller is ready to commit, looking at it as a business transaction, not an emotional loss, then the experience is a good one.

  1. What is the biggest mistake business owners make when selling a business?

They call the Business Broker (professional charged with representing the business for sale) two years too late!

Owners consider selling their business, perhaps having lost their original drive and passion, or they are just ready to retire, but they avoid acting and put things on autopilot. As time passes, this apathy for the business directly impacts its value. When you wait too long, and find yourself needing to sell a struggling business, your chance to properly prepare the business for sale may be gone. Sell when the business is doing well, perhaps giving yourself enough time to increase its value, and allow time for the process to be successful.