What are the different types of business succession plans?

During the pandemic, many people realized the value of their time and freedom. A record number of job resignations across the country represents the sentiments of many workers regarding their work/life priorities. Once given the time to pause and contemplate alternatives, many people have deemed it necessary to pursue change.  

This attitude has been shared by business owners, indicated by trends in M&A activity. 2021 was a record year in global M&A activity, surpassing 60,000 disclosed deals and $5 trillion in transferred value. The M&A market is still prosperous in 2022, and small owners recognize the opportunity to consider exit planning.  

Many business owners are now wondering what it takes to transition their business in the face of challenges like COVID-19 mandates, supply chain difficulties, rising prices, and workforce retention. Preparation is key for owners working to achieve desired outcomes during their business transition. If we learned anything from the pandemic, it’s that you can never be sure of the future. So planning for as many eventualities as possible can make all the difference when it’s time to step back. 

If you’re considering succession planning, many options are available based on your transition goals. Depending on your preferences and priorities, different options will provide varying degrees of flexibility, control, and liquidity.  

Several alternatives for transitioning your business include: 

Long-term Family Ownership: 

• This option allows for passive ownership through professional management while reducing involvement and control.  

Sell to Other Shareholders: 

• If this is an option in your business, this method provides a ready market for your shares, and leaves them in capable hands that know the business. 

Sell to Management or Employees: 

• Sale to management allows the business to be handed over to “extended family” and those who know the business best. 
• You may wish to sell the business to employees through an Employee Stock Ownership Plan (ESOP) to transfer ownership to those that understand the business internally. 

Sell to a Third Party: 

• This option allows you to relinquish control and involvement for immediate cash, and will likely provide you with the best monetary value. 

Succession planning has become more critical than ever as the pandemic has highlighted the uncertainty of the future. The planning and ownership change process can take upwards of three years, making it crucial that you are able to take advantage of opportunities as they arise. 

Practical steps to effectively prepare your business for a transition include: 

Financial Forecast and Business Plan: 

• Minimum of a three-year forecast that will withstand scrutiny 

• Complete SWOT analysis to address weaknesses and pursue relevant opportunities  
• Understand the industry and key trends 

Financial Statements: 

• Ensure you are Generally Accepted Accounting Principles (GAAP) compliant. Have you established an audit or review? 
• Pro-forma financials free of non-recurring items and “owner costs” 

Key Contracts:  

• Be aware of change of control consents that grant undue leverage to third parties 

Operations:  

• What do you do that is special and unique? 
• What areas can you improve to increase value? 

People: 

• Who are the key people in your organization, and are they incentivized? 

Taking the time to plan for your business’s future lays the foundation for a smooth succession process for all involved, maximizing positive outcomes. Meeting with an experienced professional ahead of time can set your mind at ease. And when the time comes, with a plan in hand, you will be ready to exit on your terms.  

If you have questions about transitioning your business or creating a succession plan, fill out the form below to connect with the author and expert, Brian Andreosky, CEPA.