By Jamar Cobb-Dennard, Esq. – Indiana Business Advisors
Think you or a client may sell within the next few years?
Here are key questions to answer at the start of the succession planning process:
1. Why are you selling?
This is the most important question. Leaving your baby to someone else's care and going through the stress of a transaction are not easy to stomach. The process becomes much more palatable when you know why you are going through the pain of succession. Your “why” will keep you grounded when things get tough.
"Leaving your baby to someone else's care and going through the stress of a transaction are not easy to stomach. The process becomes much more palatable when you know why you are going through the pain of succession."
2. When will you exit?
It takes at least a year to sell a business on the open market. It can take even longer to increase the value of your company by improving customer concentration, the leadership team, processes, financial record keeping, and increasing EBITDA. Identify a realistic exit date and work backwards given the work needed prior to offering your business for sale.
3. How much EBITDA do you need to hit your cash goal?
Buyers of your business (internal or external) will value your company by a multiple applied to adjusted EBITDA. In professional services, sometimes value is based on a percentage of gross sales or gross profit. In an EBITDA valuation, if you know that the average valuation multiple for your industry is 2x, it is easy to work backwards to compute how much you will need to grow your company to hit your goals. For example, let's say that your EBITDA is $500,000 now and you want to retire in 5 years with $2 million. If the prevailing EBITDA multiple for your industry is 2x, this means you need to grow the company to $1 million in EBITDA in order to hit your goals at exit.
4. How much cash will you need?
Speaking of hitting your cash goals, do not forget about debt repayment, broker fees, and taxes. Start computing these expenses at the beginning of your succession planning process. A week before closing, many business owners start freaking out about their net proceeds after taxes and debt repayment. Although the value of your company is not based on your net proceeds goals, owners should know how much cash they need to walk away from the closing table with. See your wealth manager as soon as you start planning for an exit.
"Start computing expenses at the beginning of your succession planning process. A week before closing, many business owners start freaking out about their net proceeds after taxes and debt repayment."
5. Who will take over the business?
The most attractive businesses have a general manager or leadership team in place who can continue to run the company in the owner’s absence. Identify, hire and/or train that person now so they are ready to take over the business when the time comes.
- Once you’ve identified up-and-coming leaders who may be a fit for an ownership position down the road, have them apply for INCPAS Young Pros Leadership Academy (YPLA). This free, 2-year development program offers in-depth assessments, discussions and training to get them where they need to be. Must be an INCPAS member aged 30 or younger, and a CPA or pursuing their license.