Business Succession FAQs
FAQ: About Boomer Succession – Understanding the Importance of Who and What Come Next
Quick Points on Business Succession
One key issue CEOs and small business owners face is organizational continuity – succession. You need to create and implement a strong business succession plan, before you need it, which will protect current and future leaders, and promote organizational continuity during a business transition.
What Does Small Business and Ownership Succession Mean?
In essence, business succession means planning for a transition in your business. It’s all about understanding the importance of who or what comes next.
What if you, the CEO or company owner, are incapacitated while on vacation, for example? Is there a succession plan in place for what happens next?
Business succession also means planning for when you want to move on to your next venture – whether that means owning a new company, or even retirement.
How does Business Succession work?
It could mean selling your company or business and exploring the merger and acquisitions (M&A) process. It could mean the annuitization of a business, handing over the reins to key employees, transitioning your business to the next generation – (family or otherwise). It could also mean shutting it down completely; some business owners feel that “the business is me,” and they don’t want it to continue if they are no longer involved.
Quick Points on Business Succession
If you don’t plan 3-5 years in advance of a targeted succession point, you probably will be disappointed with the deal you get, and the legacy you intended to leave may become a broken dream.
You can’t work up to the day of your retirement and then just let go. Planning for that day will make all the difference in the world in the success of your transition.
Family members may be good, or bad buyers, for your business. The more professionally crafted the sale, though, the fewer hard feelings down the road. No deal is done until the last dollar has been received and the last statute of limitations has passed. Until then, you are still in the business.
Don’t spend $30-50,000 on having your (privately-held) business evaluated. A good valuation can be had for less than $10,000 in most cases.
If someone offers to sell your business and wants $30-50,000 for an up-front evaluation, first ask how many businesses s/he has sold then get (and check-out) references. Some firms make their living on selling expensive studies, not selling businesses.
Nobody knows all the buyers in the marketplace. It may take as much as 3-4 years to get the buyer you want. Don’t sign an exclusive representation agreement to sell your business with anyone. Non-exclusive agreements keep representatives on their toes and keep the door open for new players.
A business consultant can help you with succession planning. A consultant should help you value, plan and transition your company when and how you want. A strong succession plan is created before you need it. It combines business strategy with estate planning, tax considerations and any financial challenges particular to your situation. A good consultant should help you in creating and implementing a plan that works for you, your stakeholders and /or family.
Quick Points on Management Succession
Who comes next is as important to your job as this month’s productivity goals.
Leaders who identify and groom successors early have the luxury of peaceful vacations, minimally stressed recovery periods when sick and more quality time with their families and loved ones on a daily basis.
You can’t depend on tests and systems alone for succession. They can be useful tools, but 6 months of performance on the job tells you a lot more.
Your best workers probably won’t be your best successors. Leadership is about “seeing to it that something happens,” not in doing it yourself. Your best workers may have trouble letting go of the “doing.”
On the way up the ladder of success, nobody forgets where you came from. Leave a mess behind and the smell rises.
—
How long does an ownership succession take?
How long any succession process can take depends upon your particular situation. The actual time to close a transaction can be brief, particularly if the company is cash rich and the deal strictly relates to assets. In a situation where the value of the business must be built prior to sale, or when the owner wants to make the change “sometime” in the future, or when the deal is leveraged, the transition can stretch over a period of years. We worked with a company, in fact, where the deal took two years to put together, establishing a transition/payout period of 15 years. The new owners accelerated the process, escalated the payout and paid the former owner off in 7 years. The important issue is not how long but how to get as much is possible from the deal and on the best terms.
How can I determine the true worth of my business?
The bottom line is that your business is worth what you can get for it. Its value to a strategic buyer, that is, a buyer who needs your markets, market entry, technology or your people, is very different than its value to an economic buyer, who wants a bargain. Frito-Lay, for example, engineered a stock purchase of the Cracker Jack brand from Borden for several times its asset value and more than twice its sales — by any measure an astounding price. As a powerhouse in snack foods, this purchase filled out Frito-Lay’s product offerings. No other buyer, would even consider approaching this price.
That said, there are many ways to determine the approximate value of your business. Valuations come in many packages. There are industry norms, certain multiples of EBIDTA (earnings before interest, depreciation, taxes and amortization), discounted cash flow models, econometric models and comparable sales of public companies. Each method has its strong and weak points, depending upon the capital structure and asset value of the business and its unique competitive advantages. Buyers will be using the same models, so valuation is only one consideration – it sets the stage. Determining your strategic needs, and trying to meet them through the sale, always comes first.
I want my children to continue the business…?
Continuing a family business is always a challenge. Legacy issues and initial force of will sometimes cloud good business decisions. Are there clear distinctions between performance and equity rewards? Are the new family leaders experienced and up to the challenges that face the business in the future? Are they in agreement on the parts they will play? How are inheritance issues handled for family members who choose not to participate in the future of the business? Are non-family leaders rewarded properly and is their authority free from family influence? Do any family members with significant shareholdings hold deep-seated resentments against the current family leaders or against the impact the business has had on the family over the years – real or perceived? Does the next generation have sufficient wealth to allow the current generation to withdraw significant equity from the business without jeopardizing its future, or will the current family members be required to keep assets in the business or continue to guarantee the company’s debt? There are many factors to consider, including tax implications and the benefits to the family of divesting a business altogether to preserve its wealth or distribute it over the generations.
I have key executives I want to provide for. Should I use compensation, stock or some form of “shadow equity”?
There are many ways to reward those who have helped create wealth in the business. Each has its plus and minus attributes. As owner, you have to be attentive to promises you have made to your key employees, both real and implied. You also have to consider how a prospective buyer will value the business if key executives are not locked into some form of “golden handcuffs.” The implications of using stock or cash or some hybrid are many. What, for example, is your basis in the company’s value? From a tax perspective, it might make sense to share some of the gain with key employees, or it might not. In a recent situation, preparing a company for sale, the owner decided he wanted to share equity prior to the sale. Working with him, his attorney and CFO, we crafted a stock ownership plan for key employees with a multi-year vesting period to minimize the tax implications on the employees and reflect their minimal cash infusion, while at the same time tying their performance solidly into future earnings. Your goals, along with any prior promises, will guide your decision-making.
How many ways are there to cash out?
There are truly many options in selling your company. Your goals will determine just which options to consider and your advisors will help guide you through the process. The more successful your company, the less it requires your personal attention, the stronger your personal balance sheet and the less dependent you are on the amount you need from the sale of the business to sustain lifestyle, the stronger your bargaining position in any proposed transaction. A tax-free exchange of stock, a sale of assets, an installment sale, a leveraged buyout, a merger, are but a few of your options. No one-way is right, or wrong.
If I sell with a multi-year performance plan, should I secure my interests during the period?
Protecting yourself and your assets during any buyout period makes good common sense. The corporate landscape is littered with the remains of owners who didn’t take adequate care to protect their interests. Keep in mind every step of the way that you are not out of the woods until all contingencies have been met. Having a strong team of advisors is critical not only in preparing to sell, through the transaction and during the payout period but also in being mindful of unanticipated problems. One unfortunate owner, whom I met after he had sold his company, was eventually forced into bankruptcy when the company failed. His advisors neglected to ensure that he had been freed from all obligations prior to the sale. Other owners have not gotten full value from the sale of their businesses, particularly service businesses, when (through no fault of their own) the new owners defaulted on the transaction. Both seller and buyer must beware.
What kinds of expertise do I need on my team?
Your first need is strategic. You need someone to advise you on business decisions (including the personal implications of those decisions). An experienced succession-planning consultant is an important choice. You also need input from your accountant (and your tax advisor if your accountant isn’t your primary advisor), your corporate attorney and your financial planner. Those are the key advisors you need for your team. People you should not include in your planning until you have made your strategic decision to go forward with the plan are: your banker, your customers and your suppliers. Individual strategies for informing and transitioning each of these groups are critical to the plan but prior knowledge could interfere with your business if they are prematurely advised.
I have a franchise, dealership and/or distributorship. Are there special concerns I need to be aware of?
Absolutely. Owners of franchises, dealerships or distributorships and their advisors must pay special attention to the Franchise Agreement, the dealership and/or distributorship agreement and any other contractually related items as part of the initial planning process. Companies who use channel distribution often have very restrictive agreements with their dealers/franchisees. Many today are under significant competitive pressure. A dealer or franchisee that announces to his/her channel partner a desire to sell the business may risk losing the relationship, or be required to get the transaction blessed, or lose the relationship. Some newer agreements, with annual, or bi-annual renewals, may not be renewed and your business transferred to a competitor. Many of these considerations also apply to those involved in MLM companies. Check with your company for details. Furthermore, a buyer may make retention of the dealership a contingency of the sale. Each prospective seller must tread carefully.
FAQ’s About Management Succession
I plan to promote two of my key managers to higher positions within a year. When should I begin working with them on their succession plans?
A lot depends on their management style, the length of time their team has been together and the potential of individual team members. If you have to bring someone new into the team, sooner rather than later is the watchword. On the other hand, if there are one, or more, possible successors within the team, you should begin as soon as possible with the determination process so that by the time the succession is announced, there are no surprises and hard feelings are minimized.
What about creating competition within the team?
This can work in the early stages but as you get closer to the actual date, having several candidates can actually work against both the company and team performance. Some large corporations pit top executives against one another to succeed the CEO. When one is finally chosen, the rest usually leave. If you’re concerned about a possible talent drain, use this technique carefully.
Are tests and computer-based succession programs useful?
All information can be useful. The question is whether it is applicable and/or a good determinant. Any instrument that seeks to create an absolute scorecard and selection from rated tests is, in my opinion, overreaching. Tests can be indicators. They can give us feedback (in a non-threatening way because they don’t identify who is pointing the finger); they can provide indicators of possible performance; they can be useful tools. They don’t do very well, and again that is my position, in making the selection without help from a human – and that’s you.
In recruiting for successors to valued employees, how much of the task can I delegate?
The selection process, in most companies, is really a de-selection process. The process casts a net designed to catch certain criteria and let others go. Whatever is in the net when you pull it up is your catch. You de-select from the catch until you find the candidate you want. Many managers leave this part of the selection process to the HR department or headhunter. Good as they may be, and good as your specs to them are, they could easily miss the best candidates. I usually recommend that the supervisor allow only the de-selection of candidates that don’t meet a general picture of the criteria and then make the next cut themselves. Once this first cut is made, the remainder of the process is one that should be owned by the supervisor and his/her team.
What about mistakes and “promises?”
Mistakes will happen. That’s why I recommend a probationary period (both for new hires and new functions) of not less than 90 days with the option by either employee or employer to go another 90 days before committing. This gives both sides time to change their minds. Promises are more problematic. Promises, real or implied, can (in the hands of a skilled litigator) turn idle discussion into a costly lawsuit. If you make any assertion that could be construed as a promise, clarify it and get it in writing before any bad blood is generated. That way, you can at least avoid a “he said, she said” battle if problems ever arise. I also recommend that if a succession doesn’t work out for a long-time employee, that s/he be entitled to return to his/her old job, or a comparable job in the company. Keeping good people should be a priority for all organizations; it’s cheaper than hiring new folks and it builds loyalty and morale.
Can I apply the same job description and performance standards on the successor that I used for the incumbent?
Jobs, even repetitive factory jobs, have variances that are caused by the differences in the skills’ level and personality of the people performing them. Time and motion studies, for example, are ultimately averages – charting the work of high, low and average performers. A new job requires a new mandate and new standards. Do it right and you create a new opportunity for your company and your people.
