What’s your plan for business succession?
Despite common misconceptions, succession planning is not necessarily solely about retirement. Rather it’s about opening doors for franchise owners and helping them take advantage of emerging business opportunities.
Succession planning is crucial for any franchise—and its reputation and role in the community—to survive. According to research from U.S. Trust, 38 percent of baby boomer and older business owners expect to exit their business within three years.
These exits will have a profound effect on the owner, his or her family, employees and the community. Despite the magnitude of this transition, 71 percent of owners in this age cohort haven’t developed a formal, proactive exit strategy—leaving them vulnerable to exiting on someone else’s terms.
As we stated at the start, succession planning isn’t just about retirement. A succession plan can set the foundation for a number of strategic business moves. In fact, business owners are more likely to have a succession plan in place for strategic business opportunities, such as to prepare for the possibility of a sale, merger or capital raise, according to our 2016 Bank of America Merrill Lynch CFO Outlook.
More than half (54 percent) of business owners of all ages expect to take some significant business action within the next three years, including a sale, merger or acquisition, divestiture or capital raise in either the public markets or from private investors. But whatever the reason, it’s crucial to have a succession plan in place and the following tips will help any business develop a successful strategy.
Once business owners resolve to create an exit strategy, it’s important to widen their perspective of the business. Our research shows that business owners choose entrepreneurship for a number of reasons, but what stands out is that 54 percent do so to take control of their destiny and out of self-fulfillment. As a result, many businesses are focused on the near-term needs of their operation and have not taken the time to consider their own estate and succession plan.
Many entrepreneurs languish in the routines that led to their initial success, according to “The Owners’ Journey” whitepaper by Columbia Business School and U.S. Trust. Instead, they need to embrace change if their companies are to continue beyond their exit.
Best practices for successfully transitioning ownership of a company include selecting the right advisers, understanding the real value of the business and addressing family dynamics if family members are involved. Let’s take them one at a time.
Select the right advisers. To design an effective succession strategy, business owners need the guidance of a team of advisers that includes a private banker, investment banker, accountant, transactional lawyer and business consultant, among others.
Many business owners have pieces of this team in place; to complete the team, they can start by obtaining recommendations from existing advisers and colleagues, and conducting interviews. It’s important that businesses develop relationships with these advisers early on and look to partner with people who truly know the ins and outs of their business.
Be realistic about the value of the business. Given that for many business owners their business is a great source of pride, it can be difficult to take an objective eye to the value of the business. Have a third party value the company and understand the framework and parameters of the business.
Address family dynamics. While a succession plan may involve family members, current business owners will need objectivity about the future leadership of the company. Start by finding out which family members currently employed by the business plan to continue on and consider what the company needs in terms of temperament, skills, experience and leadership ability. Some business owners designate boards with a majority of nonfamily members to help professionalize the business.
Many business owners wouldn’t hesitate to invest in the infrastructure of their business to improve systems and processes for long-term growth and profitability—especially if it guaranteed a strong return on investment. Investing in succession planning is as integral as investing in the infrastructure of a business.
A good exit strategy not only prepares a company to capitalize on emerging opportunities, it also reduces its exposure to competitors during leadership changes, protects its assets and helps it to retain important customers through transitions.
While there may be emotional obstacles to overcome, including fear of retirement and challenging family dynamics, investing in succession planning brings significant return on investment for all members of the family and continues to open doors for the business.
Cristin O’Hara is managing director and head of the restaurant group at Bank of America Merrill Lynch. Reach her at Cristin.M.O’Hara@baml.com. Karen Reynolds Sharkey is national business owner strategy executive at U.S. Trust. Reach her at Karen.Reynolds_Sharkey@ustrust.com.