How the strength of a business plays into succession planning

The topic of succession planning for a closely held business centers solely around one thing: maximizing the value for the business owner. A business is often the owner’s largest single asset of his or her net worth, which creates a strong correlation between how well an owner plans for succession and the value of the underlying asset.

“The better you plan for succeeding the business, the higher the value,” says Michael Pappas, CPA, director of the accounting and assurance services department at Barnes Wendling CPAs. “The planning part is not easy. It takes time, diligence and organization.”

He says while most business owners are successful at running their business, they often lack the full complement of skills needed to successfully plan for succession.

Smart Business spoke with Pappas about what goes into a successful succession plan.

How are succession plans structured?
There are a variety of succession plan options. For instance:
  Succeeding the business to family members.
  Selling the business to a strategic buyer.
  Selling the business to a private equity group.
  Selling the business to the management team.
  Selling the business to your employees via an employee stock ownership plan.

What business improvements can help make a succession plan more successful?
A good first step is to conduct an organizational assessment. This can be accomplished by several approaches.

One approach is to hire a professional to analyze the current organizational and functional structure, while assessing the leadership team’s abilities. From there, a plan can be developed to ensure each key function of the business has been identified and is being led by what is referred to as a ‘functional expert.’

Business owners can also conduct a self-assessment. This starts by preparing an organizational chart, listing each functional area of the business along with the name of the leader in charge of the area. Then, ask key questions with regard to each functional area, such as:
  Is this area exceeding expectations?
  What is their plan for continuous improvement?
  What key metrics are in place to measure performance to ensure achievement?
  Is the leader working collaboratively with other members of the leadership team?

The answers to these questions will determine the necessity for corrective action plans.

Next, perform a financial benchmarking analysis. The analysis does not need to be overly extensive, but it should focus on key metrics of the business, such as cash flow, growth and profitability, productivity, and strength and value creation.

By performing these initiatives, business owners are assessing their company’s vital signs. The areas deemed to need improvement should be addressed with a sound plan to cure the problems. Systems and procedures should be developed to ensure the correction stays on point and measurements instituted to assure accountability. Incentives should be developed to sustain results and behavior.

What happens after issues are identified?
Once all the issues have been uncovered, a plan should be developed to fix them. This is where most of the time and effort will be dedicated.
With the problems in mind, business owners should:
  Identify the desired outcome.
  Identify the leader who is vested with plan responsibility.
  Develop a written action plan.
  Set a definitive timeline to fix the problem.
  Define the metrics that can be monitored to ensure sustainability.
  Set up a monitoring schedule to maintain accountability to ensure completion.
Conducting an organizational assessment and a financial benchmark analysis will help business owners identify areas that can be improved to enhance the business’s performance, which increases the value of the entire enterprise. Ultimately, these steps should put an owner on a path toward building a great business enterprise that can be easily succeeded.

Insights Accounting is brought to you by Barnes Wendling CPAs