Business Succession Planning When There is No Succession
Insights into Preparing for the Business Transition and Transaction of Your Life The phone call was a jolt and shook us to our core. Tragically, we received news that a grower we had met during our Succession/Exit Planning Seminar at Cultivate ’21 in July was killed in a car accident. He was a good man, who had built a fine operation, but the business was highly owner-centric – everything passed through him. He had no accountant, lawyer, financial planner, or exit plan advisor and certainly no business continuity plan. We had a few discussions with him after the Seminar, but he had put things on hold. Now a strategic partner of ours is helping the family, amidst their grief, with the disposition of the business. Unfortunately, there is a long and challenging road ahead. There is one indisputable fact – 100% of owners eventually will exit their business. It could be through family succession, sale, liquidation, closure, death, or any number of reasons – many of which are outside the owner’s control. According to the Exit Planning Institute (EPI), 50% of exits will be involuntary, and 40% of business owners lack even a basic business continuity plan should something happen to the owner (death, disability, divorce, or illness). Suppose there is no family to take over the reins? In that case, the logical choices are to transition the business to new leadership and/or your employees (often through an Employee Stock Ownership Program, or ESOP), sell the business outright (to an investor, competitor, or investment group), or close up shop and liquidate. Since a company can often represent about 80% of an owner’s net worth, we will address the more wealth-saving and positive options of transitioning and/or selling the business. 48% of business owners don’t know how or have even thought of preparing for the sale of their company (PWC Family Business Survey). We have found that the best business transitions begin early and have a team of people working in tandem to maximize the value of the business and get you and your business transition ready. The Challenges “If you fail to plan, you are planning to fail!” – Benjamin Franklin The numbers are staggering. 10,000 Baby Boomers hit retirement age every day, and 60% of all business owners are over age 55. Yet, according to EPI, PNC Bank, and Kent State surveys, 80% of business owners have no transition plan or have not documented or communicated a succession plan. Furthermore, 80% of these businesses are not saleable, nor do they have a proper talent or family pipeline to continue. Of the remaining 20% sold, 12% will be lower than the original asking price. Even though 98% of business owners feel that succession planning is essential, they rarely have a plan. When they do have a plan, there are several reasons why they fail: Many think it is unimportant and choose to focus on the transition rather than the transactional nature of a business. Potential future leaders and family leave the company looking for greener pastures. As a result, owners do not adhere to the plan and stay long past their expected departure date. New leaders are ill-prepared to take over or do not perform to the level of the original owner. A focus on the past or a mindset fixed on “this is the way it has always been done” not only cripples future leadership but puts the future of the business in jeopardy. Time, lack of commitment, and fear. Successful Succession Planning = Transition Ready Not all hope is lost. We have been a part of many business succession and exit plans that have been and continue to be successful. We begin with an assessment and evaluation of four critical areas of personal and business transition readiness that have a direct impact on value from an investor’s perspective and the questions they will be asking: Financial Preparedness: Valuation of the business and industry comparisons, reviewing financial metrics (ratios, receivables, banking situation, and overall financial health), and the tax impact— on the owner and the business. Is the company operating at a high level and doing more with less? Planning Preparedness: Review potential buyers, professional advisors (accountant, lawyer, financial planner, exit plan advisory, and broker), business continuity planning, and addressing owner centricity. Can the business operate independently of the owner? An owner with all the key relationships and is responsible for most of the sales, especially to larger customers, can be an issue. Are customer relationships spread out among your staff? Workaholics, who are in their operations 7-days a week and micromanage their businesses, are bad bets for a potential buyer. If the owner should suddenly leave or pass away, how easy would it be to transition to new leadership or potentially sell the business for a high return? Revenue and Profit Preparedness: Consistent sales and profits— The ability to drive revenue but not at the expense of margin. New product/service offerings, new markets, diversification, and those elements of your operation that deliver consistent sales and profitable results. The presence of recurring revenue is also important (long-term contracts, vendor agreements, and leases). Bankability— Are there well-prepared financials and key performance metrics with predictable and reliable cash flow? Operations Preparedness: Do you have up-to-date modernized systems, and are your processes and procedures efficient? Is information readily available? Review management, systems, technology, standard operating procedures, and operational efficiencies. Are you staying on top of trends? Website, eCommerce, email lists, social media are all critical. Are there efficient processes and procedures in place that can be easily managed and communicated? The next step is to optimize and accelerate the value of the business before a sale or transition and understand that effective succession planning is more than just transitioning to new leadership. It is a process that could take several years, so it is never too early to get started. There are transactional components at work as well. Owners need to take an objective investor’s approach to their business— Is the risk at a low level, and is there a potentially high ROI? Addressing
Exit Planning: You Need to Grieve it to Leave it
Strategies for the Emotional Side of Exit Planning and Career Transition It was just a few minutes into our phone call, and our clients started to cry. Working on their business exit planning and reviewing the financial and transactional aspects of selling their nursery operation, it suddenly hit them as they looked over a beautiful array of plants in their greenhouse. Their nursery business was their “baby” that they had spent over 30 years growing day and night, and the fact that they were moving on brought tears of both joy and sadness. We empathized with them, and they began to apologize for their emotions and stated they were ready to move on. “There is no need to apologize, as this is all positive,” we said. “You are grieving the business, and this is an important part of your journey and transition to what’s next.” Accountants, lawyers, financial planners, business brokers, and business exit planning specialists all work in the transactional areas of selling a business. They bring expertise in each of their fields that, when combined, are critical to a successful sale or transition. However, what about the tears and the emotions involved in exiting a business? According to an Exit Planning Institute (EPI) report, over 75% of business owners who have sold their business profoundly regret it within a year after the sale. Most of these owners will end up grieving the loss of their business for many years to come. Many say that they have lost their identity and their reason for being – “How much golf can a person play?” How do we avoid this seller’s remorse, and what steps can we take to mitigate these feelings of regret during the exit planning process? We recently interviewed Chip Conley, a noted entrepreneur, author, speaker, and founder of the Modern Elder Academy. According to Chip, “We need to stop retiring from something and retire to something. There are (3) values people take from their company ownership – a sense of purpose, wellness, and community. They seemingly lose all three when they retire, and it can even accelerate their mortality by several years.” During the exit planning process, it is important to plan where the owner will find their purpose, wellness, and community after the sale or outline a personal vision of what life looks like after the business. It helps frame and answers the question, “What are we retiring to?” In addition, when working with owners on their emotional readiness for when they transition, “preparatory grief” or dealing with grief before the event happens is another way of preparing for the day they sign the papers and hand over the keys. In 1969, psychiatrist Elisabeth Kübler-Ross first identified five stages of grief in her book, On Death and Dying. She noted that those experiencing grief on losing a loved one (and a business can undoubtedly be considered a “loved one” to most owners) go through five emotional stages: denial, anger, bargaining, depression, and acceptance. Naturally, many will argue the merits of the process or disagree with the original and simplistic approach. After all, grieving is complicated, but there is consistency in our experience when the five stages are applied to exit planning. According to Dr. Patrick Downing, a psychologist who has worked with exiting business owners, “Grieving the loss of a business is not a seamless process, and there will be flip flops back and forth between the emotional stages— it is not a linear progression. It is all about finding cognitive strategies to help guide you through the emotions that hit you. It helps steer the emotions in a way to help process a sale of the business.” Thus, we find that exit planning itself can be akin to a grieving process. Denial “If you fail to plan, you are planning to fail!” – Benjamin Franklin There is one indisputable fact – 100% of owners will eventually exit their business. It could be through family succession, sale, liquidation, closure, death, or any number of reasons – many of which are outside the owner’s control. According to the EPI, 50% of these exits will be involuntary, and 40% of business owners lack even a basic continuity plan (should something happen to the owner). When it comes to exit planning, denial is by far the biggest hurdle. When we talk to business owners and ask when they plan to exit, the typical answer is 3-5 years. Ask them 3-5 years from now, and the standard answer again is 3-5 years. Denial is clinging to a false reality, and it plays a significant role in why 70-80% of businesses don’t sell. When we are asked by business owners when they should start exit planning, our answer is always a resounding “NOW!” Whether the business owner is in their 20s or 60s, we have never heard clients complain that they spent too much time planning. On the contrary, planning leads to business optimization, better decision-making, and less owner-centricity, all of which will drive up value in a buyer’s eyes. According to John Dini, author of Your Exit Map, “Five years is a reasonable planning time. Ten years is better. There is no time frame that’s too far out to be thinking about your exit.” Many owners can get stuck in denial indefinitely. We recently had a 72-year-old client tell us he wanted to delay the start of his business exit planning for at least six months, even over his wife’s objections, because he was just too busy. Certainly not what a potential buyer wants to hear. Overcoming denial is not easy, and it takes a lot of time, effort, and focusing on the bigger picture. We start with a preparedness assessment and a valuation because denial often manifests itself in postponing a departure and what an owner perceives as the fair market value for his/her business. How can one get past denial? Examine your fears, think about the consequences of doing nothing, and identify the irrational beliefs and your reality. Most importantly, talk to someone— a trusted
