Succession planning in a recovering economy

The coronavirus pandemic hit the US in a way no business was truly ready for, but those with an emergency or business continuity plan have been able to fare better than those without. For any small business owner considering an exit-plan, succession planning and recovering your business from the impact of coronavirus can and should go hand in hand, read on to learn how.

The importance of succession planning

Succession planning ensures your small business is ready for the future and remains successful as you prepare to transfer leadership. But this process isn’t just for companies with owners closing-in on retirement. Any type of business can and will benefit from having a well thought-out succession plan. And honestly, there’s no better time than now to start.

Although it can be a large undertaking, this planning process is more important now than ever. The current pandemic was and still is a big wake-up call for the companies that did not have an emergency or business continuity plan to resort to. If we can make any slight claim that anything positive has come from this pandemic and economic downturn, it would be that businesses have been prompted to assess the current standing of their company and draft actionable plans for the future.

Get business financials in order

Business valuation is a critical component to succession planning. If you’re planning out 12-24 months for selling your business or handing it off to family members, start getting your financials in line now. There are many valuation methods out there, and depending on the industry you are in you may need to use a specific one, or provide additional analysis to get your true value.

Here are three of the main methods small to medium sized businesses (SMBs) use:

  1. Adjusted Net Asset Method:
    This approach focuses on a business’s net asset value. The formula for calculating your net asset value is TOTAL ASSETS minus TOTAL LIABILITIES. This is a somewhat uncomplicated approach if you already have a clear and up to date view of your balance sheet.
  2. Capitalization of Cash Flow Method (CCF):
    This second method is used when business earnings have been stable for a long period of time, or the time that is being considered for the valuation. The calculation is accomplished by dividing cash flow by a capitalization rate. One time events or expenses should not be included in this calculation.
  3. Discounted Cash Flow Method (DCF):
    The last method we will cover is used to estimate business-value based on future cash flows. The two main elements of this method include projected future cash flow and the time value of money (TVM). As this method relies on TVM, the calculation is more complex than the other two methods and not easily written. However, there are many online valuation calculators that can run the numbers for you.

No matter which method is used for your business valuation, having your financials in order is paramount. Make sure you and whomever is assisting you with gathering your statements are aware and educated on all current tax policies and write-offs to increase your value.

At CCA Global Partners’ LIFT2020 Conference, Gary Pittsford of Castle Wealth Advisors offered additional advice on getting your financials in order to begin your succession planning. Learn more in the clip below.

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Your employees

The employees on your payroll are the backbone of your company, and likely one your biggest expenses. Employees are a very difficult topic to talk about when times are tough and cash flow is tight, but the people that make up your business play a vital role in succession planning. Take a deep look at your entire workforce – not just management roles. You may be surprised to see that high performers and other key employees within your business are in support positions. You should have a succession plan in place for each managerial position, should they have an unexpected leave of absence or retirement, and great performing support staff is a good place to start when looking to fill-in a temporary role.

Retaining your talent is more important now than ever. If your top-talent has done well during this time, it shows they do well under pressure. Of course, you cannot dismiss the employees that have been greatly impacted by the virus if they were a high performer up until March 2020. To keep your talent with your business, you need to provide them with training opportunities to grow their skill set and challenge them. It is also important to show your appreciation for your star employees if and when possible with bonuses and other forms of compensation. On the flip side, your business can not afford to keep employees on your payroll that are not performing.

With this in mind, integrate your succession plan with a hiring strategy for 12-24 months before you plan for the business to change hands. This allows for the hiring team to pinpoint the attributes needed to fill vacant roles as well as giving time for new talent to be trained and observed. Digital solutions have been a great strategy since March and have allowed businesses to speed up this process by hosting interviews via video. Using digital means to assess and review current employees and potential hires takes shorter time and it is just as effective.

View the short clip below for advice on the topic offered at LIFT2020 by Gary Pittsford, CFP of  Castle Wealth Advisors.

Finding the right planning partners

In addition to including your internal management team and employees, a business absolutely needs to form an external team of advisors to help execute the succession plan. The key people or groups you will need to align with are: 1. Business accountant 2. Business financial advisor and 3. Business attorney. Each of these play a significant role in succession planning and a business will rely heavily on their expertise throughout planning and execution processes.

  • Business Accountant:
    Your accountant is responsible for helping with PPP and other government and tax applications, working directly with the bankers, and keeping your business on track for recovery and succession plan.
  • Financial Advisor:
    Your financial advisor will assist with the building of your recovery and succession plans, coordinate between your other advisors, and go through all your financials and confirm the value of your business.
  • Business Attorney:
    Your business attorney will also lend expertise when creating your succession plan. Their responsibilities will include creating the Letter of Intent (LOI), Asset Purchase Agreement (APA) and buy-sell agreement documents.
Check out the clip below for more from LIFT2020 on how to choose these key members of your advisory team with additional details on how each can help you with your plan.

Increasing Business Value Now

Owners of small businesses put their heart and soul into making their business successful, and therefore have a personal connection to the business which often skews their view on the value of the company.

Alas, if your business does not come out of the valuation with the results you had anticipated, there are ways to raise the value – and what better time to raise the value than now? We are in a unique time with many small business government programs available to help you recover business losses brought on by the pandemic. Take advantage of them as soon as possible!

Next, focus on improving your gross margins. By lowering your monthly expenses you increase your business value – making it critical to trim fat wherever you can. Think of what can be cut out of business expenses that will not negatively impact your bottom line. As previously mentioned, payroll is often your largest expense, so it’s important to approach it carefully. Cuts in overhead costs or finding ways to run your business more efficiently are other examples of how to increase your gross margins – and another great place to focus.

See the final video clip below to hear additional tips from Gary Pittsford, CFP on how to start increasing your business value NOW.

Your succession plan is not a one-and-done process. The best plans are revisited and reassessed at least once a year to consider current economic and outside impacts as well as changes within the organization. Do yourself, your family, and your business a favor by revisiting your succession plan and updating it as needed so that you always have an actionable plan should the unexpected occur. 

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