Your business’s value depends on the strength and quality of operations, culture, people, and reputation. These areas can be where they need to be to take your business into the future IF you commit to succession planning. Your business is more valuable to you than anyone if you can create an effective union of personal, family, and business desires.
Succession planning requires commitment, and the incredible financial and emotional returns of business succession is a goal worth seeking. The proof is in the pudding. When thinking about the future of your business and the future financial goals you have, consider these four key components:
1. Your business is more valuable to you than a buyer and any substitute asset a sale could create.
Your business currently returns approximately 20% on market value, some more or less depending on how it operates. There are also very lucrative affiliate benefits such as reinsurance, real estate, P & C insurance, and vacation opportunities through the manufacturer, franchiser, and business 20-groups. A highly productive business is a complex hybrid asset comprised of inanimate, animate and social elements.
- Inanimate: Business components such as franchise agreements, inventories, working capital, equipment, technology, facilities, etc.
- Animate: Your people, including managers, employees, customers, vendors, advisors, etc.
- Social: Your relationships with family, friends, and partners. Friends are similar to partners – you choose them, whereas you are born into a family. And, you choose your partners for reasons other than money.
The optimum interaction of these makes a private closely-held business one of the most productive organizations on the planet. This extraordinary return is why “the Publics” and private equity are aggressively courting the owners of highly productive businesses who want out but do not have a succession plan.
At first, “the Publics” thought they could duplicate your performance but have since recognized hired hands working only for money can not duplicate the “family-like culture” of successful closely-held companies. Their plan now is to pick off the dysfunctional family businesses and achieve 60% of what private business commonly produces. 60% is acceptable for Wall Street. The rush of “the Publics” and private equity to get into your space seeking only 60% of what you can produce should be a validation of the value of your business and motivation to do Succession Planning.
2. Selling the business is a viable succession option when the sale is the most practical and logical byproduct of the succession planning initiative.
Irrespective of your business’s return on investment, you may consider selling for various reasons such as burn-out, no successor, children wanting to enter the business, or fear of economic collapse.
If you are considering a sale, it is essential to prepare, as the value of the average business is discounted by approximately 33% due to commissions, closing costs, discounts on FF&E, Federal capital gains tax, State income tax, recapture of deferred taxes, including LIFO, and chargebacks. And to further complicate matters, the reinvestment of sales proceeds is both an emotional and financial challenge.
An emotional challenge because, as opposed to operating your business, very few of you are expert, experienced investors who are comfortable capitalizing on the stock market’s ups and downs. It is the volatility that generates the profits, and it is the volatility that creates the fear.
From a financial challenge perspective, after the sale of a business, it is normal and prudent to be defensive-minded and alert for the next “Bernie Madoff.” In our experience, the result is a conservative portfolio generating approximately 7% return on about half of the sales proceeds because some of the cash proceeds are typically shared with key managers and family or find their way into a new vacation home. Therefore, selling the business without the forethought of succession planning can reduce the return on your core asset from 20% to 3.5%. From a cash flow and lifestyle perspective, the sale of a dealership can be a real step-down.
3. Succession planning is an investment in your financial security and the welfare of all those who have helped you be successful.
Whether you realize it or not, you are thinking about your succession plan daily, your business’s continued success. Congratulations! Reading this article is your succession planning effort for today.
For each contingency addressed that has the potential to impact your business, you will increase the value of your most important asset. By addressing the issue, I am not saying you must resolve the issue. I am saying you have to acknowledge the problem and tenaciously work on it.
4. Common Succession Planning Issues Impacting Business Value
The Federal Government is not the only organization to have a PPP program. The Rawls Group has its own PPP. Unfortunately, our PPP does not send you a check. The TRG PPP is our description of the contingencies, the issues impacting the continuation of your success, the value of your business. We classify these as the Predictable, Probable, and Possible issues that affect the continuation of your business’s success. You are familiar with many of these; you just have not thought of them as predictable, probable, and possible:
As you see, the Succession Planning issues or contingencies are all over the board. Those listed in the download represent only a small percentage of what we have experienced in our 48 years of succession planning. For each contingency to the continuation of your success that you address, you increase the value of your most important asset.
In summary, succession planning builds value, whether your choice is for you or family members to remain owners or sell to a third party. Without considering the PPP of succession planning, you are leaving a lot of opportunity on the table.