According to a TD Waterhouse business succession poll, 76% of small-business owners don't have succession plans.
They're simply too busy running their companies, with 45% still trying to determine what the plan would be while the other 31% just haven't got to it.
The Canadian Federation of Independent Businesshas found that significant benefits accrue from succession planning, so it should be a high priority. Business owners that have done succession planning report that it helped provide for their families' future, minimized future tax liabilities and improved their businesses' financial stability.
Succession planning is not an isolated event. It should begin at least five to 10 years prior to the targeted exit date, and it should start with value enhancement to ensure a greater valuation when it's time to sell or transfer the business.
According to business advisory firm Grant Thornton, several key elements typically drive value.
A company's historical performance directly affects valuation because it's an indicator of how the business is likely to perform in the future. Being able to show sustainability is more than tidying up a balance sheet. It means developing a track record of sales, growth and profitability accompanied by a plan for growth.
A company's value is also affected by the importance of its sector. Owners can't influence the state of the economy or the selling price of similar businesses, but they can learn how they compare with others in their industry. They should look at how competitors are valued to see where they line up. Deficiencies can then be addressed and improvements instituted.
The company's value proposition must be complete and well communicated. It should be clear to any potential buyer that the business model is unique and has a sustainable advantage over its competitors. This includes building in such intangibles as goodwill, supplier relationships, patents, trademarks and proprietary products.
Building out a proven business model with a strong management team and efficient systems shows the company can operate once the founder has left. Successors will have been identified and groomed, possibly with a choice of replacements, and there might be an independent board of directors.
When it's time to do the math, there are several ways of arriving at the business valuation. They can be based on assets, market and income.
The asset-based approach is essentially a calculation of assets minus liabilities. Proven businesses are generally assumed to be worth more than their net asset value, so this approach is typically used in conjunction with others.
The market-based approach examines valuations of similar businesses within the sector and comparisons are made with recent transactions in the industry.
The income-based approach involves substantial number crunching. Historical financial performance is projected to evaluate future performance and provide a net present value.
Business analysts use a combination of these approaches and other variables. The valuation is a complex calculation that should be done by someone without an emotional attachment to the business. •
