Succession Planning For Business Owners

By Mark Rittmanic

A staggering 30 percent of business transitions and exits happen under some form of duress, where the transition or sale of the business is not taking place at a time or with a process of the owner's choosing. A business leader may become incapacitated or die, or there may be an essential executive or large client who leaves. These events often leave the rest of the family and leaders without a lot of good options for how to continue running the business, or to realize the full value from a sale of the business. This not only affects the family but also the employees, and may even impair your ability to attract and retain talented employees.

If you currently don't have a well-crafted succession or sale plan, you're not alone. According to the survey, more than 70 percent of business owners over 55 years of age do not have succession plans in place. And 60 percent don't even have a successor in line. This is a perilous position given that, in the same survey, over 90 percent of the same business owners agreed that they have little or no income diversification. So the family business is their primary income source for themselves and their retirement, not to mention family members who work in a business that is not protected.

These numbers are scary in relation to succession planning. The reality of the situation is that family business owners need to be prepared for transitioning their businesses either within the family or to outside owners. Similar parallels, both in statistics and risk, could be drawn to describe how family businesses suffer from a general lack of a formal planning process. Issues like strategic business planning and the creation of sustainable business practices are often put off in favor of just keeping the business running every day.

Sometimes it's just a matter of putting those big “issues” into the perspective of more manageable projects. For example, strategic business planning could better be described as, “Run Your Company Every Day to Realize Maximum Value.” Or creation of sustainable business practices as “Make Sure Your Business Runs Effectively Even if You're Not There.” And growth planning is “Build a Business with a Process You Can Scale Up.”

Eighty percent of the senior generation of owners I've met want to transfer the business to the next generation of family owners, rather than pursue a sale, but the reality is that you won't know the right transition for your business until you've reviewed YOUR personal and life goals.

The Annual Physical
Recently, a business owner came to me with the request, “I need help to grow my company to $20 million, and then I plan to sell it in three to five years.” Our first step was to carefully understand this owner's goals and help him determine if doubling the size of his business would honor those goals. We conducted a short business assessment, sort of like an Annual Business Physical, to get a flavor for the overall health of the business. As a business owner wearing many hats, it can be difficult to see the bigger picture issues that may affect your transition options and the perceived and actual value of your business. Following the business assessment, where we gained an understanding of the business landscape, we worked with the business owner to understand his landscape and what he was really seeking. Through these two processes—the assessment and the review of owner goals—the owner realized that the business was worth enough today to satisfy his long-term needs, and that waiting five years to sell the business was going to severely undermine his life goals. He decided to start the process of selling the business immediately, and six months later sold for a handsome multiple.

The lesson of the story is that it is hard to make educated decisions on a succession plan for your business until you have a clear understanding of the health of your company and your short- and long-term needs as the business owner. The right choice for you may be one that you never even considered at the beginning of the process.

Once you have an understanding of your long-term goals for owning the business, it is wise to make a list of your options to transition the business: succession to a family member, hiring professional external management, ESOP, sale to another company or private equity firm. Rate them for how well they meet your goals. While it can be hard to rate numerically your goals and the future of your business, using a decision process that uncovers and ranks the hidden choices is essential to discovering the choice that is right for you. Keep in mind that this process doesn't take five minutes; it may take five hours or five days to see through the clutter and come to the “right” decision for you.

Once you've reviewed options and created a general path to follow, you will have a good idea of where you're headed and how long it will take you to get there. But the hardest part is still to come. For most companies, the best answer is not to sell. And even for those who would like to sell, most are not ready to sell today. Most businesses require varying levels of change to infrastructure, people and/or processes that will significantly affect the valuation formula multiple.

Getting to a Successful Transition
There are four key pieces that must be in place within a business in order to ensure you have paved the way for a successful transition for your company:

1. Create “sticky” clients and defensible future margins — You want your company to have unique product and service offerings that cannot be replaced easily, and clients who buy from you again and again because of that offering. When the process for creating sticky clients is well established, maintaining top-line growth during and after a transition is enhanced.
2. Have a compelling future vision for growth — Make sure all your people understand and share your vision for the future of the business. When this is done right, you can sell the future value of the business to your successor, your employees or an external buyer.
3. Have a growth engine in place that doesn't include you — It needs to include people, processes and a well-understood client acquisition funnel. This gives you the flexibility to introduce a successor, sell to employees or transition through a sale to external buyers. Because many business owners don't remain engaged in the business post-sale, any successor wants an engine in place that enables the company to perform in the future without you.
4. Know your growth levers —These are the key performance indicators for the business. Make sure you have tools in place to predict future performance. This replaces your firm's “tribal knowledge” with a process that successors can understand, be they relatives or new owners.

As you move through these phases, the road becomes clearer, but you still have some tough choices to make. You know your personal goals, have mapped out your transition options and thought about how your business will be viewed by potential successors or buyers. Each option carries with it changes. You will need to decide which changes, if any, you are willing and able to implement in order to pave the way for succession and increase the value of your business. The same changes that serve an efficient transition also drive predictable and increased earnings.This implementation will require you to address difficult issues.

In the Driver's Seat
The succession planning process is not easy. If it were, more than 30 percent of business owners would have one in place. The smart owners are those who make this a priority and do the work necessary to pave the way for a successful transition. The “prize” that awaits you, the business owner, is something I call The Position of Choice. When you are in a position of choice, you are in the driver's seat and can choose among many transition plans that make sense for you, your business and your loved ones.

You may recall the old Fram Oil Filter commercial: Pay me now or pay me later. That slogan holds true in family businesses as well. Careful succession planning will prepare your company for the next 100,000 miles, regardless of who is in the driver's seat.

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The PEI Journal • Fourth Quarter 2007 • Volume 1, No. 4 • Contents are Copyright © Data Key Communications, Inc.
All rights reserved. • Nothing may be reproduced in whole or part without written permission of the publisher.