Succession Planning - What Will Happen to Your Business?
Jim Correll, director Fab Lab ICC at Independence Community College, Independence Kansas
The topic of business succession planning, or a general lack thereof, always comes up in discussions about helping rural American small towns prosper. No one likes to see established businesses simply close down instead of transitioning to new owners. There has only been limited success in promoting and facilitating business succession planning. Sometimes public meetings take place, but some don’t attend as they don’t want to “advertise” that they might consider selling. I think we’ve made the concept too complicated, thinking it’s all about what the accountants, lawyers and consultants need to do. Those people are necessary, but there are several things that need to be done before getting the heavy-hitter professionals involved. The time to start is now. Sometimes owners or close family members become ill and force a transition to happen earlier than expected. After several years of observation and my involvement in a few transition efforts, here’s a top 10 list of things business owners should do to set up a smooth transition to a new owner. Notice the expensive consultants come at the end. You should work out your strategy to accomplish the first seven before initiating the last three.
•Give yourself some time. Businesses generally don’t transition within a few months. Allow a year or two to find the right prospect and situation. Don’t wait until you’re 3 months from total burn-out to get started.
•Keep up appearances. Keep the store nice and updated, including your digital presence; web site and social media. Repaint, remodel and rearrange over the years. This not only makes the business worth more at transition time, but your current customers will come more often if they know you’re always making changes and improvements.
•Keep up with the changing times and markets. Markets are changing and changing fast. You’ll have a much better chance at transition success if you’re products and services have been updated to be in demand now, not what was in demand five or ten years ago. Make a regular practice of innovating new offerings to your customers.
•Create your “cookbook”—how you do things. Well documented procedures of how you do things will open up the transition market to people that aren’t necessarily experts in your trade if you can point to a book and say, “Here’s how we do things here.”
•Separate real estate. We counsel entrepreneurs and potential small business owners not to buy the building that goes along with a store, unless they want to be in the real estate business. Being prepared to keep the building and lease it to your new business owner will widen your prospect market.
•Be prepared to finance. As a rule, it’s very difficult for the buyer to obtain full financing to buy a business for any more than the assets are worth. Most of the time, current owners have to be willing to finance a part of the purchase. You may not want to do this, but it might be the only way to find a buyer.
•Consider your income tax strategy. Serious prospects, eventually, will want to see your tax returns to verify the business is performing as you say. Be aware that a tax strategy to minimize profits will also minimize the profits the prospect sees in reviewing your returns. This may reduce the value of the business in the eyes of the prospect.
•Where will the money go? Assuming you’ll have a successful transition, be thinking about where you want the proceeds from the transition to go. This would be a good thing to discuss with your financial planner.
•Contact your accountant and attorney. Finally, after all the above have been considered and done, consult your accountant and attorney. Consider making up a transition team of your financial planner, accountant and attorney.
•Contact a business broker—maybe. There are plenty of people that will be eager to confidentially help you find a buyer, without charging you a commission. These include representatives of Network Kansas and the Kansas Small Business Development Centers. We know who to contact in both of these organizations. Don’t forget your banker.
Selling a business is somewhat like selling a house. Keeping it updated and in good repair over the years is not only more beneficial to you but makes it worth much more when it’s time to transition to someone else.
Jim Correll is the director of Fab Lab ICC at the Center for Innovation and Entrepreneurship on the campus of Independence Community College. He can be reached at (620) 252-5349, by email at email@example.com or Twitter @jimcorrellks. Archive columns and podcast at jimcorrell.com.