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What Does Succession Mean to the Successor

Both management and ownership succession tend to focus on the exit strategy of the person in place.  It’s about their legacy, liquidity and letting go issues, and, their selection of a successor, either alone or with assistance.

Just as important, though, and often largely overlooked as an equally critical element of the process is the focus on succession’s meaning for the successor.  The new owner/leader will have his/her own set of transition issues as s/he takes on the role previously held by a predecessor and moves to make the job/company, his or her own.

Long-term transitions are usually destructive, pitting the outgoing leader against the newcomer, as they take charge and let go.  Usually not more than a 3-6 month transition is in order, if that long.  While the agreement of sale, may contain  a long-term employment/consulting contract for the incumbent, it will probably be bought out rather than lived out.  In management succession, the incumbent has usually left the organization or moved into another position without much of a transition (though the exiting person may be on call for a time).

Therefore, organizations with strong work flow processes and documentation tend to fare better than those with largely oral cultures.  Another strengthening technique for management succession is to include members of the work group in the selection process.  Making them part of the process often helps choose a better successor and begins to form bonds with the new leader even before s/he takes charge.

Whether engaged in an ownership or managerial succession process good systems and document and engagement of the people involved in making the succession work contribute to stronger long-term results.  Is your organization well poised for succession?

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Business Succession for Real Estate Firms

I was featured in a July/August 2009 issue of Real Estate Business Magazine, a print publication, on succession planning for Real Estate Firms. The article is titled: “Step up your succession efforts…even if you have no plans to step down,”  by Chris Ryan.  july_aug09-re-biz-mag To open the PDF file in this page, click the link; to open it in another tab or browser window, right click the link and select your option; to download it,  also right click and select save link as and save it to your computer for later reading.

Reprinted with permission from Real Estate Business magazine. ©Copyright 2009 by the Council of Real Estate Brokerage Managers. All rights reserved. This item can’t be reproduced, reprinted, or retransmitted without express consent of Real Estate Business magazine and the Council of Real Estate Brokerage Managers.

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Planning for Succession: Is Everyone Ready?

When it comes to succession planning and having exit strategies in place, a great many companies, their owners, and their key executives, are far from ready.  Some have well thought out plans and good documentation that cover both contingencies and eventualities.  Many of us can talk about who and what may come next but it’s all talk.  And a few of us are in denial.

What are some of the contingencies you need to prepare for?

• Your accidental death or that of a key employee
• Your accidental temporary disability or that of a key employee
• Your accidental permanent disability/incapacity (physical or mental) or that of a key employee
• You, or a key employee loses interest in the company, the profession, or in each other (few experts traditionally prepare for this contingency, but more are planning for it every day)
• Weariness (this is a condition I have discovered among entrepreneurs.  No matter how much you love your work, your company, and no matter how integrated it is with your ego, there come times when weariness just saps your energy.  Sometimes a good vacation cures weariness.  Sometimes it lasts a long time.)  A plan to protect the organization should be prepared for when you “aren’t there.”

What are the eventualities you need to prepare for?

• Retirement
• Life after work
• Death

Think about these contingencies and eventualities.  If you don’t have a written exit strategy/succession plan in place that covers these possibilities, you may be at more risk than you thought.  Buy yourself some peace of mind, put it in writing and let someone you trust know what and where it is. Simplest solution, hard copy this page and pencil in answers to the “what if’s.”  That will keep you until you can put together a more formal plan that covers all your risks.  Your succession consultant, lawyer, CPA and/or financial planner can all help.

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When Your Passion Fades – Issues in Business Succession

Additional Points When Winding Up Your Business

1)    Craft a written plan.  In the plan, list everyone you do business with and everyone who cares about the future of the business.  You then need to decide – who has to know, what do they need to know, when do they need to know it.  Before you tell anyone, you need to calculate the impact of shutting down on your personal financial situation.

2)    Unless your net business debts are very small so that they can be covered by the sale of existing assets, and there are no contingency liabilities, never just walk away.

3)    If closing down, it is better to sell it as a business or to sell the assets?  Is it better sold all together, or as parts?

4)    Look for buyers for all of and/or parts of your business that might be attractive to other businesses.  Do this BEFORE announcing you are winding down or you could have a “run” on what business remains.  Do no overlook your employees as potential buyers for some, or all of, your business.  Get input from a legitimate investment banker and/or business broker.  Real estate brokers generally do not specialize in selling businesses and do not have experience in the nuances of selling a business.  By all means, if selling real estate, use a real estate broker.

5)    Contingent liabilities include items such as: unexpired leases (both real estate and equipment, making sure that if the leases are assignable that all personal guarantees are assignable as well.  In the case of real estate, do the premises require restoration to a “move in” condition before selling or terminating the lease? Are there obligations to employees, etc., that may not be obvious?

6)    Assets should be converted to cash at “fair market value.”  Do not give favorable prices to friends and family as an attorney for a creditor could construe that sale as a “fraudulent conveyance,” opening you up to more liability and legal process.

7)    Work with your advisors, succession planner, attorney and accountant to make sure you notify taxing authorities, comply with all regulations and notify other interested parties, including utilities and telephone providers.  Get receipts and written proof that all filings have been made, all taxes paid and that you have a receipt for all other payments.  Any tax liabilities left unpaid will become the responsibility of the owners.  Such obligations cannot be discharged through bankruptcy.

8)    Set a date for final cessation of your orderly liquidation.

9)    Check with a records management specialist to identify what records must be retained (personally by the shareholders/owners), and what records can be destroyed.  Provision should also be made to wipe all hard drives on your computers (prior to transfer to new owners).  Company IP must be protected and/or sold, if saleable.  Make sure to shred and dispose of all records that can be destroyed.

for part one of this series click here:
http://cli.gs/Z8tBnp Testing Your Passion – A Leader’s Responsibilities, part 1

For part two of this series click here: http://cli.gs/n7Mq07 Crafting your Business Succession Plan – My top 18 Tips

© 2005, 2009 By John J. Reddish, CMC

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Boomers In Business for a Bit Longer

A lot of Boomers who had planned to retire and/or sell their businesses won’t be doing so anytime soon. The poor economy is pushing down the amounts buyers are willing to pay for businesses. Many businesses that might have garnered 5-7 times EBITDA in recent years are now attracting offers of 2-4 times.

Boomers entrepreneurs and small business owners, who have been counting on the sale of the business to augment or provide the bulk of retirement income have little choice but to stay on.

Even Boomers with retirement portfolios have been hit hard, and some entrepreneurs who invested with fraudulent money managers are back at ground zero.

What this means, then, is that succession challenges will be compounded:

• business as usual must be maintained, future plans suspended, even if you are tired and ready to move on;
• successors, if you have them in place, will have to be patient for a longer period (and accommodations may have to be made); and,
• new business challenges that arise must be met as before.

One step you can take, is to begin your succession planning process now, or to reexamine what you already have in place.  Of course, you will need to adapt it as the markets and circumstances change.  Beginning to think (not as a worry, but as a conscious consideration) about an exit strategy, might just help you see and take advantage of the opportuntunities presented, when the time is right.

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Selling Your Intellectual Property

We all know ownership succession in business is about understanding the importance of what comes next, so as to maximize owner value, because next counts.  When planning your company’s future, it may come as a surprise when I tell you, “Selling your IP (intellectual property) are often the hardest assets to value and are sometimes either minimized or even, overlooked.”

Your IP (Intellectual Property) can include:

• Copyrights
• Trademarks and Service Marks
• Patents and Trade Secrets

Their commercial value can be influenced by the size of the markets and product/service sales related to them, by their age, by how well they are known, by what they “stand for,” by their applicability to other products/services (potential for line extension), among other variables.

Succession Planning and IP:

When working with your succession planner, your accountant and appraisers, ask about the appraiser’s qualifications in regard to valuing IP.  It just can’t be valued the same way as you might value real estate, equipment or cash flow.  Unless you are comfortable with the appraiser’s approach, ask your succession team leader to get an appraiser steeped in IP valuation.  It may cost a little more initially*, but it can pay off in the end, particularly if the IP can make up shortfalls in other asset areas and help the owner(s) receive enough proceeds to maintain lifestyle. Because, as I said at the start – what comes next, counts.

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*Some sellers question the value of doing their own valuations in advance of a sale unless the IP value is a significant portion of the selling price.  Certainly the buyer will be valuing the IP, along with other assets.  Because the buyer  has no interest in paying more for your company than required, s/he is likely to “low ball” the IP’s value.  Without your own appraisal, you have no way to counter the argument.

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Crafting Your Business Succession Plan and Strategies: My Top 18 Tips to Your Successful Business Sale

Getting out, and getting paid, when you sell your business are two different objectives. Crafting successful strategies that get results and implementing them takes time, effort and a variety of talents.  Shifting ownership from you, your family, or your partners to a new owner is a delicate process. Just remember, no sale is final until you have survived the negotiations, weathered the closing, cashed your final check and run the statute of limitations for all contingencies.  If you don’t get your best deal, or you don’t get paid every last cent, shame on you.

Tips On Taking Precautions:

1.      Get Your House In Order – Make sure all your company information/documents (minutes, contracts, forms, statements, etc, including any Shareholder Agreements) are in order.  Selling your business can take some time, so once everything is current, keep it that way.

2.      Decide What You Want To Accomplish (with the sale and with the rest of your life) - Make 2 lists of goals – one personal and one professional, detailing what you want your life to be like and look like once the business is sold and you no longer have to come into the office.  Resolve any conflicts between the lists.  Share the lists with your top managers.  They will, in most cases, be staying on [and locking them into their jobs may be key to achieving your objectives].  Ask them for their opinions — in writing — of both the goals and the potential impact of reaching the goals in their areas of responsibility.  You want them on board with the sale, not working against it.

3.      Ferret Out And Resolve Personal Obligations and Contingent Liabilities – Review ALL loan, lease and other financial obligations that may exist to determine if there are any personal guarantees in place.  If possible, negotiate personal guarantees away.  (Some lenders, including leasing companies, often roll existing guarantees forward as part of a renegotiated lending package.  Assuming there are no guarantees in place, without checking, can be costly.)  If you can’t negotiate new terms without personal guarantees, consider paying off the obligation at settlement.  Buyer Indemnifications are not worth much if the buyer can’t pay.

4.      Shift To A Profit Strategy – The US Tax Code makes the smaller company the best tax shelter around.  Once you decide to sell, the purpose of your financial reporting is not to minimize taxes, but to enhance value.  You may pay some taxes during the transition, but it will both enhance company value and make the company more attractive.

5.      Recruit A Strong Team – Getting your best deal often depends on recruiting and using the right team of advisors.  These advisors include your attorney, accountant, financial planner and consultant and/or investment banker.  These professionals comprise the team you will need to achieve the most dollars and the best terms.  Each has his/her own specific skills and you will need them all.  The few dollars you spend for professional assistance (usually 10%, or less, of what you receive from the sale [as you receive it]) will more than pay for itself in getting you a better outcome.

6.      Get Your Team On Board With Your Goals And Set Criteria For The Sale - Working with your team, use your goals’ lists to generate a criteria checklist.  Items for this checklist include:

a.      minimum selling price (see #3 below) required to close any gaps in your financial (estate) plan and ensure either a secure retirement or the seed funds you need for your next endeavor;

b.      timelines for when sale proceeds are needed (retirement funds, if part of the plan, may not be accessible without penalty before a certain age).

c.      type of buyer most suitable to run the business;

d.      timetable for sale;

e.      objectives to achieve prior to any sale (including employment contracts, shadow equity or equity for key executives);

f.        transition period and employment contract for you;

g.      desired terms and conditions; and,

h.      other financial issues.

Divide your completed checklist into MUST items, those things a buyer and/or sales transaction must include before you accept a deal, and LIKE items, those which while nice to have are not essential to the sale. A good, solid checklist takes time to develop, but it will keep you on target.

7.      Qualify and Vette Everyone You Share Confidential Data With – Set criteria for vetting prospective buyers and insist that any prospective buyer sign a Confidentiality and Non-Disclosure Agreement.  Having the process and documents in hand helps if deep pockets suddenly arrive on the scene – and you will be seen as more professional for having these agreements in place.

8.      Let Prospective Buyers Start Talking Price - Pricing is important (but I don’t recommend sharing it with prospective buyers in advance).  While you must get your minimum-selling price, you will almost certainly want more.  And you may, or may not want to establish an asking price (once set, it’s hard to ask for more and almost always negotiated downward).  You should have your consultant or one of the other team members prepare (or commission) an independent valuation of the company.  The valuation will give you a good starting point in establishing a realistic pricing strategy, keeping in mind that your business may well be worth more to one buyer than another.  Ideally, a valuation should allow you to compare several valuation approaches to the company’s worth.  These computations can be based on: multiples of earnings approaches; asset value plus goodwill; or some of the many sophisticated cash flow models.  Be assured, the professionals representing the buyer will be doing similar calculations.  Knowing how much to settle on with each prospective buyer, and under what terms, are central to your success.

9.      Establish and Maintain A Paper Trail – Establish a file where you can keep a paper trail of all deal related documents.

10.    Answer Your Most Important Question:  Are You Ready To Move On? - Take a look at all the preparations completed BEFORE even looking for a buyer or dangling a tantalizing “carrot” in front of an eager prospect.  Be brutally honest with yourself.  Have you considered all the contingencies?  Have you reviewed and considered all your financial plans?  Would strengthening the business over a short period result in a greater selling price or better terms?  ARE YOU READY AND WILLING TO LET GO AND WALK AWAY?  Unless your answer is, YES, put everything on hold and get back to work.

Tips On The Selling Process

1. Find The “Right” Buyers – Lots of people talk a good game but when it comes time to sign on the dotted line, there may only be a few, or even one IDEAL buyer for your business.  Finding him/her can be difficult.
   • Places to look for prospective buyers include:  Investment bankers, venture capitalists, local banks, accountants and attorneys, in addition to many business brokers, are all potential referral sources for transactions.  Your management team may be ready and willing to make you an offer.  A family member, or friend, might want to continue the business.  Customers and/or vendors and/or competitors might have interest.  A number of new resources have appeared online in the form of message boards and social networking sites – even a casual conversation can lead to a meaningful opportunity, so be prepared.
   • You can also do a little market research into those companies and individuals whose business interests fit your criteria, but don’t make any announcements until you are truly ready to go public and tell the world. Bear in mind, also, that developing a strategy of who to tell, how and when will make for a much more stable transition for customers, employees, lenders and other stakeholders.
   • (Once you announce the company is for sale, there will normally be more “tire kickers” than you want to deal with.  (In addition, without a transition strategy as noted above, some competitors will almost certainly use such information as a way to attempt to “raid” your key accounts.)  Match every prospect against your MUST’s.  If you discover a “must” missing, move on the next prospective buyer.
2. Develop A Short List – A short list of prospects should be composed of those who inquire (or are identified and contacted) who you feel might make a good match and where a good transaction is likely.  Rate them on their potential attractiveness, on their potential ability to complete the deal, on their ability to grow the company and also on their anticipated ability to make all payments to you in a timely manner.  Once you have a working list to go with your criteria, you, or preferably a member of your team, can begin making contacts.  A significant show of interest will require a prospect to sign a Confidentiality Agreement noted above.  Only after this document is received will you begin to disclose (in stages) financial and other data to a prospective buyer.  (A copy of the form Advent uses is available; use the contact form here or send me an email, put “Get Results Agreement” in the subject line and we will send you a copy of ours.
3. Do Your Homework About Prospective Buyers - While you are having “get acquainted discussions” and disclosing prelimiinary data, have your team conduct a thorough due diligence review to qualify prospective buyers – both at the company and individual level.  This happens BEFORE releasing your own sensitive information.  Due diligence is a responsibility that both the buyer and seller have.  Serious buyers should insist on reviewing records, tax returns, financial statements, public disclosures and other documents.  They should speak with your accountants, attorneys and advisors.  They should want to speak (and this needs to be handled very sensitively), with your vendors, customers and employees.   They should also be prepared to prove they have the financial resources to complete the transaction.  You need to be asking similar questions about them.  Due diligence is essential to both sides in crafting a win-win deal.
4. Come To Terms With Your “Adopt Or Sell” Mentality – Realize, particularly in the initial discussions and early negotiations that you may be perceived as an entrepreneur more interested in having the business “adopted” than in it being sold; or (if you the owner is incapacitated) as an inflexible, corporate type intent only on selling a product line, division, or company, before a certain date or at a certain price; or as shareholder representative who doesn’t know the business or its potential or future and just wants out. Knowing where you are coming from helps everyone get past possible initial misperceptions and is key to enhancing deal value.  Whatever your mentality, it will require a studied approach and great sensitivity.
6. Negotiate Cautiously – Only after all this preparatory work has been completed can the challenging task of negotiating the sale get underway.  The good news is that homework has given both you and the prospective buyer insight into the other.  If there are cultural issues, they have usually surfaced and can either be resolved or both sides move on to other opportunities.
   • In moving forward, my advice to clients (buyers and sellers, alike) is to strive to control the terms rather than the price.  Several years ago, I negotiated a deal in which the seller and buyer were far apart in their estimates on what the company was worth.  We structured the agreement of sale so that the net present value, the cash value today, equaled what the buyer wanted to pay, but the total dollars for the transaction over time were more than the seller originally asked.  Both sides felt they had won (and they had).

Tips on Closing The Deal And Getting Paid

1. Stick To Your Plan – Identify and align your options in relation to being paid at closing and after the sale.  Pricing, who gets what, escrows and other issues are all important, but when you are selling you can never forget the that the only meaningful goal is Getting Paid.  So, knowing what you want is critical to getting it.   A brief list of options includes; a strictly cash sale due at closing; a tax free exchange of stock (with a public company); cash plus a promissory note plus an employment contract; cash, a promissory note and a non-compete agreement; venture capital.  The list goes on.  Be sure at closing that you have dealt with any contingent liabilities remaining.  (Just a reminder that such transactions may include: unpaid taxes; unexpired leases; lender UCC’s (Unified Commercial Code filings) that have not been satisfied.  Failure to clear these items could result in costly comebacks at a later date.)  Allow an average of from 2-6 months for the process to be completed during which time serious buyers identify and line up any additional funding sources, or funding terms and conditions.
2. It’s Not Over ‘Til It’s Over - Make sure the agreement provides for regular financial reporting while you are still owed more than $1.00 from the sale, that default terms can be invoked prior to any future bankruptcy by a new owner and that there are sufficient teeth in any default provision to give you a fighting chance to restore the company to health if you have to re-possess.
3. At Closing, The Devil Is In The Details – Closing can be tricky and unfortunately the closing process has unraveled many deals.  Again, go gently.  A deal isn’t done until all parties have signed off on the transaction.  One deal I witnessed fell apart at the closing table when one of the advisors, claiming he was “emotionally moved” by the integrity exhibited by both sides, read a poem he had written for the occasion.

One aspect that requires precise attention is the Representations and Warranties provisions that are a part of every deal.  Neither the buyer or the seller should sign off on these provisions until they are fully understood and agreed to – looking at both what’s going on at the time of closing and what might happen down the road.  Representations and Warranties are sleeping giants that can unravel deals down the road and need to be handled as such.

After the closing, your new life begins.  You are either out the door or an employee who will (probably) be out the door once the new ownership gets a handle on running the business.  (Employment contracts notwithstanding, most former owners are often asked to leave long before their consulting/employment agreements expire).

More importantly, the “buck” now stops somewhere else.  Remember that and stand aside – it’s the other person’s turn.

Whatever your choice, good fortune and good luck to you as you explore your options.

© 2008  John J. Reddish, MS, CMC

John, and his Associates at Advent, help entrepreneurs and other leaders who want to master growth, transition and succession to get results faster, less painfully and in ways that work for them. This happens through consulting, coaching/mentoring, training and/or speaking. Understanding that there is no ONE path to get results, client services are tailored to the way s/he can best use our services.  John is a member of the National Speakers Assn. For more information: www.getresults.com. For succession information, go to: www.thesuccessionplanner.com. Or call 610.506.6311 in the US, 01.610.506.6311internationally, or at johnr [at] getresults [dot]com.

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Choosing Your Legacy?

I was writing a postcard to my grandkids and the thought occurred to me when signing, “Grandpa,” that the name was chosen for me.  It wasn’t the name I wanted. Legacies can be like that an as well. We may have definite ideas on how we want to be remembered.  Unless we take definitive action to see that it happens a certain way (even then there are no SURE guarantees), it is those who come next who will decide.  A humbling moment for Grandpa, but in this case, it’s quite all right.

John Reddish, blog: www.thesuccessionplanner.com, website: www.getresults.com, www.twitter.com/getresults

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Who Gets the Rights?

I remember reading in “Confessions of an Advertising Man,” that David Ogilvy (founder of the legendary O&M) had signed over the royalty rights to his son and that his son, as a consequence, was doing quite well. In succession planning and its implementation, Intellectual Property (IP) rights often get short shrift. They are harder to value than hard assets and the introduction of a new technology can wipe out their value entirely. They are, however, assets worth valuing and selling (or bequeathing) at the right price.

Keep in mind when seeking to pass them on, though, that rights can produce royalties. Rights, which are restrictions on those who don’t have them, also tend to invite imitation if not downright infringement. IP rights are expensive to get and to maintain. They are also very costly to defend. A fellow panelist at an IP workshop said that a typical patent in the pharmaceutical field cost the company about $645,000 in filing, maintenance and defense costs over its lifetime. Everyone, including the rest of us on the panel, were stunned. So, if you own IP, it is probably worth something, but it also carries with it some challenges when sold, donated or bequeathed.

John Reddish’s expertise is helping entrepreneurs and top executives who want to master growth, transition and succession, get results faster, less painfully and in ways that work for them. John is a member of the National Speakers Assn. For more information: www.getresults.com. Or call 800.726.7985 in the US, 01.610.388.9335 internationally, or at johnr@getresults.com.

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Remembering – “It’s not creative unless it sells”

In all my years in helping clients identify their “it” (unique selling proposition, strategic advantage, brand, sustainable identity, etc) – that special thing/essence/feeling that makes them unique in the eyes of others, some call it their “unique selling proposition,” one agency slogan from the 1980’s has always stood out as clean, clear and simple. It’s the Benton & Bowles campaign (crafted for their agency by Al Hampel) “It’s not creative unless it sells.” Read more

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