“What will happen to my business when I’m gone?”

This may be one of the big questions keeping you up at night. Maybe you’ve already concluded that there is no one in the company with the desire and ability to take over.

Or maybe you’ve been so busy dealing with all the urgent issues involved in running your business that you haven’t had time to even think about what will happen when you’re gone — at least not consciously.

But chances are, concerns about how to achieve an orderly transition of your most significant asset are hovering in the back of your mind.

If you are considering a sale of the business and not purely a generational or internal transition, determining when the transaction would take place is a large portion of the decision. You might be ready to sell the company now. However, if you aren’t quite ready, then you might want to cash out on a portion of your equity and continue to run the company for a period of time with a financial partner.

Just like you have a financial plan designed to safeguard your monetary investments, you need to plan ahead to safeguard the value of your most valuable asset — your business. Think of it as an investment in your post-business future. After all, what the business is worth when you’re ready to transition depends in large part on the groundwork laid today.

The $1 Trillion Problem

Succession is a challenge for organizations of every size. Among S&P 1500 firms, market value lost to mismanaged succession of executive leadership is estimated at close to $1 trillion a year.

Among small and midsized businesses (SMBs), succession challenges are well-known. Most are lucky to have one member of the next generation willing and able to step into a leadership role — much less multiple kids fighting to take control, as in the hit TV series Succession.

Most business owners intuitively know that succession planning is important to the business. The problem is that you’re so busy running the business that planning for the future often gets pushed to the back burner. Where do you find the time to teach future leaders how to run the business?

It certainly is a tall order to impart all of your wisdom to the next leader. In addition to being the entrepreneurial mind that started the business, you might be the key salesperson, HR manager, lead project manager — the list goes on and on.

It can also be uncomfortable to think about your business being run by someone else — even a family member. It feels risky to let people into the inner sanctum (What if they walk out the door and take all this knowledge with them?), so you keep the ingredients to the secret sauce close to the vest.

But here’s the hard truth: Your role with the company will come to an end. And by failing to actively plan for succession, you’re decreasing your chances of maximizing the value you receive in exchange for your many years of sweat equity.

Succession Planning Readies the Company for a Sale

In many cases, there’s simply no one ready and willing to take ownership. In these cases, a transaction with an external buyer is often the best solution to achieve sustainability for the business and a payday for the current owner or owners.

Succession planning is just as important in a transaction scenario as it is for an internal transition. Lack of a succession plan can negatively impact business values and, in some cases, even kill a potential transaction.

Potential buyers expect to see a management team that is capable of running the business long after you’ve sailed into the sunset. A clear transition plan will translate into a better transaction multiple for you.

Think about it from the perspective of the buyer: If the majority of the business value is based on what’s between your ears, what would an outsider be buying? Your workforce likely has some value, especially during a tight labor market, but you certainly can’t expect top dollar from a buyer that is going to have to build a leadership team from scratch.

Succession planning isn’t just about replacing yourself. The premature departure of one or more key employees — a department head, project lead, or any employee with an in-demand skill set — can negatively affect deal value, as well.

Different types of buyers will have different expectations about the owner’s involvement post-transaction. A purely financial investor would most likely need you to stick around for a few years to operate the business. However, even a strategic buyer would want to see that you have management depth in operations, as well as finance and accounting. M&A advisors such as investment bankers can help you assess where you are and the steps you’ll need to take to prepare the business for a sale.

Plan Ahead to Monetize Your Biggest Asset

It bears repeating: A succession plan is an investment in your post-deal future — and it’s never too soon to plan. By giving yourself plenty of lead time, you will have a better chance of putting in place the pieces necessary to capture the best value for your business. Longer lead time also gives you the opportunity to course-correct when life inevitably throws a monkey wrench into your plans. When you’re ready to talk about your plans for the future of your business, give your CRI advisors a call.