Succession planning for business owners: How do you want to get out of your business?

Honey bees are truly fascinating. They offer several lessons in organizational theory. The queen bee may be considered the head of the colony, yet interestingly enough, she may have little or no “voice” in how she is replaced. If she dies or disappears, the hive creates a new queen. In reality, they create a number of potential queen larvae and the first to mature kills all the others. However, the hive may also decide that the queen is too old or failing and needs to be replaced, so they create a new queen. Or conditions may be so favorable that they decide to split the hive and create a new queen and the old queen has to find a new home. In each case, it is the hive that “decided” the queen’s fate, not the queen.

Makes you wonder, doesn’t it, what would business be like if the workers decided when it was time to replace the leader? Of course, creating a new business leader is not as simple as feeding royal jelly to a larva…

However, just like the queen bee, there are four ways a business owner can get out of a business. We will call these four exit routes the four Ds (rhymes with Bees).

First of all, just like the queen bee, you could die on duty. It may not be the preferred option, but if the time comes, you won’t much care what happens next (probably). And therein lies the problem: what happens to the business afterwards?

You can let your family figure it out, and if they don’t have the desire or ability to run your business, it’s going to be hard on them and their loyal employees. You may have anticipated this situation with an insurance policy, a shareholders’ agreement, and an interim management provision, but it’s not ideal for the morale of your employees. Of course, even with the best of plans, it could still happen, so it’s always best to be prepared with insurance, documentation, and contingency plans. However, by choice I assume this is not the output most people are looking to achieve.

The second option is Dissolution. That is, at some point you decide to retire and decide to close the business. All the hard work you’ve put into building it will have been for nothing as its legacy fades. Moreover, if you have employees, they would lose their livelihood. While this may be preferable to death in service, I’d suggest, as it involves conscious choice, it still seems like a pretty sad way out.

The third is Disbursement, that is, pressuring someone to buy it from you. It could be your management team, a supplier, a customer or a competitor or just someone who likes to run their business. This could be the biggest payday you’ve ever had. It could also be the most disappointing payday you’ll ever have if you don’t put in the necessary preparation to make your business attractive to a buyer.

There are a number of factors that go into making the sale of your business as lucrative as possible. Firstly, and perhaps obviously, the stronger your business is financially, the more it will be worth. That means good margins (for your industry), strong cash flow, and evidence of growth and growth potential. It also means having good financial management systems: a budget (which is used), a cash flow forecast, a capital plan, an inventory plan, a marketing plan, a salary plan, etc.

Second, it means that the business is not dependent on the owner for leadership. In other words, there is a management team in place. Businesses that trust their owner to be there to manage day-to-day operations typically fetch 3-40 times lower selling price than those with a management team.

Speaking of overreliance, if the business relies on one or a limited number of key employees, customers or suppliers, it will also affect the valuation of the sale.

These are all things you have control over. As well as solid recurring income and high customer satisfaction rates. But its development takes time, largely because you can’t do everything at once. Also, once you’ve developed strengths in these areas, you’ll earn a higher rating if you have several years of historical data to prove it. So a lucrative exit can take 5 years to achieve.

However, having negotiated a sale, lucrative or not, that is not the end of the story. You could be asked to keep the release clauses, especially if you are still heavily involved in the business. That period can be depressing. It can be even more depressing when you don’t meet your buyout goals and never receive your final payments.

And the negatives may not end there. Once you finally go out of business, it can be quite disheartening to see your business flounder and fail at the hands of a new owner or management team who just didn’t know how to make the business work. It happens more often than you imagine.

Which brings us to the fourth option, which I call Distribution. This could imply the Disbursement, although it does not necessarily have to be so.

By this I mean that you distribute the equity of the business among all your employees. This way everyone benefits from the years of hard work they’ve put in to help you grow your business.

If you decide to make this a purchase, you’ll get your payday, but you could also decide to give them most of your share. Why would you do this? Well, under certain circumstances, you could end up with a more valuable stake even though you own less of the business.

Imagine having tens or hundreds of people driving the business because everyone benefits from your success instead of you having to drive and try to drag everyone along with you too.

You may think I’m painting a bleak picture of what business is like, but sadly, dragging your employees with you is more accurate than you might imagine. According to a 2016 Gallup poll, around 70-83% (depending on the country you operate in) of the workforce is not fully engaged in their work. That means they are like an anchor that holds you back while you try to propel your ship forward.

Now imagine what would happen if the anchor suddenly came loose. You can pass. You only have to look at the financial performance of employee-owned companies like John Lewis Partnership, Springfield Remanufacturing, Gripple, to name a few. They have outperformed their competitors and the market in general for long periods of time; They are not a flash in the pan. Therefore, distributing most of your shares to your employees could earn you a lot more in the long run.

Unlike the queen bee, you can choose when and how to leave your business, and the best time to start planning your exit is now.

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