Succession: Starting Early and Communicating Clearly

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Succession:
Starting Early and Communicating Clearly

Working closely with over 200 accounting businesses across three continents, we get to watch their evolution and be a part of their success. Many milestones are achieved such as revenue goals, income goals or launching a new service.

A critically important milestone is succession: the act of transitioning the business to new owners. Data shows it is rare that succession achieves the goals of BOTH the ‘exiting’ partners AND the new owners. Here are some observations on increasing the chance of securing a great outcome.

 

 

Talk to your Partners about Succession Early

Decisions on succession should not be made in a hurry. They are giant decisions, often life-changing. Many accountants will only do this once in their lives so they don’t have much experience. The different options and outcomes take time to understand and should be surfaced early on and then revisited frequently. Over time, priorities and goals will change.

In the busy-ness of running an accounting business, partners may not get together to address long-term, strategic issues. This is a mistake but can be fixed by putting succession on the agenda early.

 

Define what “Exit” Means for You

What ‘shape’ might the exit event take? Is it the same for all partners or do some want to continue in the business? Will some partners (or employees) buy out departing partners? Will a third-party buy out the partners? Is that third-party another accounting business or another kind of investor? If a buyout is to occur, is it partial (in which case only a portion of stock is sold and some is retained) or is it complete (in which case all stock is sold)?

These are just some of the possible structures to consider, but each approach will have a material impact on the lives and wealth of exiting partners. An ideal scenario should be identified as well as any approaches which would NOT be contemplated, so they can be taken off the table.

 

Who would you (not) sell to?

It’s impossible to tell who may be interested to acquire your firm AND have the means to do so at some time in the future. But speculating on this can be a useful exercise. For example, if the buyer is someone within your firm, you may be able to groom them for succession many years in advance. If the potential buyer is another firm, you can evaluate their approach and credibility early.

You could also eliminate options because you don’t want to sell to a certain individual or firm for a variety of reasons. Some firms are highly acquisitive and make no secret about this. Getting on their radar may be a smart move early on.

 

 

Timing

It is almost impossible to predict accurately when succession events will occur. Often accountants will say, “I’m going to sell my business in five years” but very seldom does this come true. You may get a great offer in three years OR there may be no offers when the time comes to sell. You have to be flexible.

That said, putting a time horizon on these discussions is a sensible move.

 

Valuation

One of the reasons to exit a business is to generate wealth and ensure financial security for your future. But how much wealth? What’s the minimum you would accept to sell your business? What’s a comfortable number? What’s an aspirational number?

How far away are you from achieving the aspirational number? How will valuation be calculated? A multiple of revenue is a common method of valuation but certain acquirers will value other attributes such as an interesting client base, differentiated products, limited dependence on the current owners, good processes and so on. Understanding these ‘drivers’ of valuation will help you make short and medium-term decisions to increase enterprise value.

 

Partner Roles in the Business Before Selling

Preparing for and executing a transaction is demanding. Not only are you running the business but you have to present the business accurately, entertain the potential acquirer, consider your team members, clients and so on. You may have built the business so that it “runs itself” and you have a limited role but it is likely you will get busy so as to make the transaction a success. Certain skills are needed such as financial, sales, strategic, human resource and communication skills to name a few.

How will the partners accomplish all these tasks? Planning is required. And you will probably need the help of third parties.

 

Post Deal Activity

This is one of the most neglected topics but it’s really important. What happens the day after you complete the transaction? Do you go back to work to help transition the business to the new owners? For how long and for what compensation? Many people find this environment difficult because they’ve had complete autonomy in their business for a long time.

Perhaps you will not be ‘locked in’, that is, you have no obligations to the new owners. You are free to do whatever you want… but what will you do? After an intense career in your business, “doing nothing” is unlikely to be an acceptable way to spend time. Your hobbies might not be sufficiently stimulating. Thinking this through in advance is a smart move.

 

 

Certainly the sale of a business can be one of the most exhilarating events in a career but it can also be one of the most destructive.  Getting these topics on the agenda early makes sense and you may want to consider third party facilitation so that you tackle the topics in a constructive way.

 

ABOUT

Mark Ferris
CHAIRMAN & CEO, PANALITIX

Mark Ferris is an entrepreneur who has founded, built and 'exited' numerous businesses realizing success for shareholders, employees, customers and acquirers. He has a particular interest in software, solutions and service businesses and frequently writes on related topics.

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