As a small business owner, there are many things that fill your typical day, most focused on either maintaining the business you’ve built or on ways to grow the business. Having worked with small business owners over the last decade, I know most of you reading this post don’t spend any measurable amount of time thinking about your succession/exit plan. With this in mind, the focus of this post is to answer a question I hear frequently from owners and their successors – “When should we start developing the succession plan?”
The answer depends on a variety of factors (e.g. your timeline for slowing down and eventually leaving the company, goal for extracting value, growth goals, health issues, readiness of your buyer), but as a general rule, here are some simple guidelines to keep in mind based on the party you would like to sell to:
- Selling to an employee(s) or family member – At least 10 before you want to be able to leave completely;
- Selling to a peer/competitor – 2 to 3 years before you want the sale to occur.
Selling internally, whether to an employee or family member, requires time to help ensure the deal can cash flow (most internal buyers don’t have any money), as well as to gradually develop your successor(s) into the future owners of the business. As a general rule, it is almost never too early to start developing and communicating your succession plan. While your plan may not be written down with flow charts and diagrams, having a plan in mind and communicating your plan is a great way to retain and attract the best talent. As you near the 10-year exit window mentioned previously, its time to commit the plan to writing and begin developing a checklist of what to do and when to do it to keep your plan on track. With an elongated timeline, you’ll give yourself the most options and typically be able to obtain the best results and value.
External sales to a peer/competitor require less planning and lead-time than an internal sale because a competitor already has experience operating a business and brings additional cash flow and capital to the transaction. However, even a sale to an external buyer should be planned and prepared for to provide you with the most value. Why 2 to 3 years of prep? In most cases, the goal is to find a good buyer who can sustain your legacy and grow it, as well as obtain a fair price for the business you’ve built. Therefore, 2 to 3 years will allow you to begin reviewing your key business metrics and “fine tuning” your operations to make the business as attractive as possible when its time to starting looking for a buyer.
A few closing comments on the topic of succession planning. Succession planning generally refers to the act of planning for your eventual exit from the business, but it is a process not an event. So, while you may not have an interest/need to start planning for your exit today, there is a lot you can and should consider doing with the equity now to give you, your clients, and next generation of owners in your business the best outcome. Bottom line, waiting until you are ready to leave is not the time to start deploying your exit strategy. If you have any experiences of your own, agree or disagree, I welcome your comments!