Your Perfect Match: Considerations for Succession Planning

Grooming the right leadership team or bringing new owners into your company must be carefully orchestrated. Future owners need to match your goals for transfer of ownership, but they should also mesh well with daily operations and employee expectations.

If you plan to exit gradually, your chosen successor must also be open to your continued involvement and guidance. The vetting process might feel like dating, and the final arrangement might feel like a marriage. With that in mind, you want every opportunity to choose your future leaders wisely.

Assess Yourself First

Most matchmaking profiles start out with a questionnaire or profile about you. You will answer questions about your own personality, interests and goals. The same process should happen during a succession planning process.

For example, if you love working with customers but prefer to transition daily operations or administration to someone else, you may prefer an exit strategy that allows you to stay involved with customers for a period of time before you exit completely.

The succession planning process will look much different if you want a clean break after the transfer of ownership.

Assess Possible Matches

As a closely held business, you have many options for a change of ownership. You could consider internal buyers or external buyers.

Internally, you might seek an executive or a family member to purchase the business and succeed you. Before someone becomes an owner, you will need to offer incentives and additional compensation to this person to align with their increasing responsibilities. You may also need to allocate funds for leadership or finance training. Some incentives may not come in monetary form but keeping the future leadership team motivated and hungry will incentivize them along the way.

Externally, you might entertain a merger or acquisition by a competing or allied company, an offer from an independent buyer or a private equity group purchase. With less knowledge of potential external buyers, your succession planning will require early research on the pros and cons of different scenarios.

If your company has existing minority owners in the business who will continue with the company after your exit, that scenario will involve an initial discussion on whether or not those owners can finance your exit or if additional owners will need to come on board.

Assess Value to a Buyer

Before you get too excited about a possible match, you need to determine how badly that potential buyer wants your business or your share of the business.

It’s only a match if the intended buyer is actually interested. If interested, the buyer’s offer should also meet your expectations for fair market value.

Go in with both eyes open. Perform your due diligence to quantify the company’s fair market value based on current and forecasted market and business performance. For example, you may have a strong client list that is attractive to a potential buyer, but you are carrying higher than average debt. You will need to address this liability to improve your negotiating power with potential buyers.

At Anglin Reichmann Armstrong, we perform business valuation studies for a variety of reasons, including preparation for a change of ownership. An initial assessment of your company’s value can give you a starting point for increasing its fair market value as part of succession planning and your desired exit strategy.

To start a conversation about your exit strategy, contact Michelle Jenkins , CPA, MBA, a partner at Anglin Reichmann Armstrong.