It is predicted that over the next decade, approximately 20 million privately owned businesses in North America will be for sale. Why? Some call it the graying of America. But whatever you call it, statistics indicate that almost 800,000 business owners plan to retire by 2009.
Many of these are family-owned businesses whose owners assume they will pass the business to their offspring. But the reality is that approximately 60 percent of business owners in the 60 to-64-year age bracket do not have a succession plan in place. In fact, less than 30 percent of privately held companies successfully pass from one generation to the next.
Most business owners see themselves reaching retirement age and handing their company over to a sibling or other family member. But in reality, succession often occurs in a time of crisis such as death, disability or divorce. At that point, it is too late to plan objectively and that lack of objectivity and over-abundance of strong emotion can lead to poor decisions.
Lack of succession planning is the factor
most commonly identified with succession failure.
The savvy business owner recognizes that he won't live forever and puts a plan in place to protect his business and his successors.
Having a succession plan is not a luxury but a necessity:
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Companies with multiple owners are especially vulnerable to negative fallout and confusion if a succession plan has not been developed.
- Planning an exit strategy with a professional advisor early enough in the process can go a long way toward increasing the value of the business when it's time to leave.
- Businesses that have strategic goals in place (including an exit strategy) are more attractive to potential buyers.
- Family and professional relationships are at risk if there is not a clear, understood succession plan.
Getting Started
First, honestly assess the roles and responsibilities of family members who work in the company. Consider that you may either have to choose among several capable successors or you may have to accept the fact that none of the family members really want to carry on in the business after you leave. This will mean engaging in some potentially challenging and stressful conversations. But the primary goal is to make sure family members are treated fairly and relationships are preserved.
Second, take a look at the current management team. Is the right team in place? And are there any team members who would be good candidates to take over should your family members not be interested? In addition, are there members of senior management that should be involved in the decision making and planning process?
Things to Consider
- How will family advisory councils or boards of directors participate in the succession planning process?
- Do you have a strong team of outside, objective counselors?
- Accountant - Tax and estate planning
- Attorney - Legal structuring
- M&A advisor - Valuation and divestiture planning
- Make sure ALL parties genuinely embrace the plan. Otherwise implementation could lead to feuding and potential litigation.
- Bear in mind that you may not have the luxury of deciding when you leave the business. Things like death, disability and divorce can occur unexpectedly so plan accordingly.
Third, get your personal financial affairs in order. Your personal financial situation will affect the decisions you make about the business. In addition, don't confuse succession planning with estate planning. Estate planning focuses on the distribution of wealth and minimization of taxes. Succession planning may start with estate planning but it goes much further. It is an integral part of the business owner's long-term strategic plan.
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Diversify your financial resources so you are not over-dependent on the business assets.
- Plan for a secure retirement income and for eventual loss of spouse.
- Address liquidity of your estate that can be drawn on in the event of your death to pay taxes and expenses.
Fourth, find out how much your business is really worth. An M&A advisor can provide perspective on:
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Possible strategic buyers
- The company's market, history and competitive advantages
- Management and operational practices and processes
- Historical and current financial performance
- Products and services
- Intellectual property and other assets
- Employees and their expectations
- Business strategy
- Customer base and relationships
- Supplier networks
In addition, an M&A professional can give you an invaluable of your industry and its market conditions.
Fifth, begin with the end in mind, as Steven Covey would say. Determine the desired outcome upon completion of the succession plan. What do you want the following to look like?
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Leadership roles
- Management roles
- Business positioning
- Financial structure
Finally, work with your advisory team to identify potential exit steps. Don't be afraid to think beyond the box. Options include:
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Transferring to a family member
- Selling to key employee(s)
- Selling to employees using ESOP
- Selling to co-owner(s)
- Selling to a third party
- Engaging in an IPO
- Retaining passive ownership
- Liquidate
Through it all, don't forget the Thanksgiving Dinner Clause - How you handle your succession out of the business will affect family gatherings for years to come.