For most cash strapped startups, the last thing they want to think about is succession plan. Too busy putting out fires to think of long-term goals! Just achieving a positive cash flow is a huge challenge, they feel they don’t have the luxury to indulge in business succession planning. But, as we, and many other startups have discovered, starting with your secession plan on day one doesn’t cost, it pays!
Succession planning is basically planning ahead for the day when you, as the founder, will retire, leave, acquire a business partner or investor, or die. It involves identifying and developing new leaders who can replace the old ones when they also retire, leave, or pass away. In other words, it includes all the steps that you as a founder must take to ensure the sustainability of your company – no matter what the future holds!
The secession plan should not only include contingencies for replacing yourself and top staff, but it should also include an exit plan. It’s not just, “What if you or your top leaders leave?” it’s also, “What if your company is sold, goes through a merger, achieves a public offering, or in some other way, goes through a capitalization event?”
Now we’re not just talking about maintaining the operation of your company. Now were talking about preparing your company for a potential acquisition or, if you prefer, a change in ownership. Too many startups overlook exit strategies they can easily employ on day one to put them in a better position to negotiate when that day eventually comes. Remember, the better prepared you are, the shorter your potential acquirer’s due diligence period, and the more profit you will make. And isn’t that why you’re doing it anyway, to monetize on your brand equity?
Some founders may reason, “This is a family owned business. I’m going to pass it on to my children. I don’t need to be prepared for an acquisition.” But nothing could be further from the truth! The fact is, even your own family will benefit from you taking the time to put together a business succession plan.
That exit strategy, whether you exit the business are not, will provide your family with an organizational structure that clearly defines the business assets, legal matters and documents, liabilities, intellectual property, sales growth, personnel records, and inventory. These are not only the things that a potential acquirer wants to see, but they are essential to your successors ability to understand where the value lies in your company.
So, when it comes to business succession planning you must take a twofold approach. How does the business keep going when there’s turnover? And what would a potential acquirer look for in terms of documentation and reports?
Do you have an apprentice or a protégé? Do your top managers have assistants who can move in quickly and take over their job if necessary? Have you identified exactly what an acquirer would be looking for? What about an acquirers legal, HR, production, marketing, and management teams?
Generally, the longer an acquisition takes, the less is paid to the company being acquired. Why? When the acquirer’s due diligence takes longer to discover, the word gets out that your company is for sale. You may lose your top people. You can lose your top customers who are waiting to see the prices, terms, and quality the new owner will deliver. You lose your credit from your suppliers who see you as a “short timer.” All of these factors figure heavily in your brand equity and company valuation. After all, what you’re really selling is relationships and the probability that those relationships will continue to be fruitful on into the future.
We believe any well written succession plan should include stay bonuses, i.e. “Must be present to win!” This will help ensure that your key people not only stick around until there is an exit, but they will also help you get there.
It’s not enough to just achieve a positive cash flow if you haven’t set yourself up for a quick acquisition (whether you want to sell or not) and sustained leadership. When you start up, ask, “What then?” You’ll be glad you did! And so will your family, your acquirer, your investor, and your customers! The time to protect the value of your hard-earned success is NOW!