Don’t Let Your Succession Plan be a Bad Sequel
When movies are made correctly and have appeal, there is no denying the impact. They win awards, inspire the audience, and fill the pockets of the movie studios. However, these blockbusters can also be the platforms for some of the biggest flops on record. After a successful movie the audience wonders what will come next, and the studio wonders how they can keep the franchise going? Good sequels can be important, expanding on worlds and delving deeper into plot lines, but a bad sequel can strain our love for the movie by losing key actors and directors, and recycling plot lines and jokes. One such example is director Allan Arkush succeeding Harold Ramis to direct Caddyshack II, which flopped and earned a 4% score on Rotten Tomatoes. Compare this to the 1980 original classic, which received 74%, and you can see the difference. The same thing can happen in business. Once it is time for a CEO or business owner to retire, the whole company can be put on edge. Many of the employees are thinking about what happens next. Are they left having to find a new job or can a new CEO/owner create the next bright sequel for the company? It might not be possible for the Dan Ackroyd’s of the world to replace the Bill Murray’s in an iconic role, but with the right director they have a better chance to make the role their own and not some cheap imitation of the past. A study from the Exit Planning Institute shows that 76% of business owners plan to transition their business in the next 10 years. However, 83% do not have a transition plan in place. Coincidentally, lack of planning is the number one reason why businesses fail. During succession planning a business needs to be transitional, meaning ready to pass leadership onto another. A business also needs to be transactional, meaning maintaining a high level of value and low debt, so it is attractive to a potential buyer. The Script The key factor that determines a successful succession is planning. One should begin this planning the moment they obtain leadership and/or ownership because succession does not happen only when one retires. The only way to beat the worst-case scenario is to plan for it and pray it never happens. With a thorough plan a company will increase in enterprise value, secure future worth, and reduce potential stress. Without a plan, the decrease in value could be substantial. According to the Exit Planning Institute, 80% of companies are simply not able to be sold and only 8% of companies actually get their asking price. When creating a sequel, the studio needs to consider how popular the first movie was and if a second would generate enough revenue. Then they choose a director, receive a budget, write the script, and cast all the roles before sending the project off for production. The same considerations need to be undertaken in succession planning. This requires weighing all your options for a successor. Most people look just to the C-suite, but is there any outside hire or fresh face in the company that should be considered? You also need to budget. How much is this transition going to cost? Are there going to be other changes that will take place that need to be considered? Next comes the company plan. Is the new successor going to use the same business model or create one of their own? The answers to these questions will help the company become more transition-ready. This means that all the transactional and transferable aspects have been fine-tuned and prepped for the next stage. In a movie you can usually tell when there will be a sequel. At the end of the movie you are left with either a cliffhanger or some unanswered questions. It is also easy to tell when a movie studio was not planning on doing a sequel but decided to release a shameless cash-grab. Typically, the sequels that are released after a movie that seemingly wrapped everything up and left no real questions are the ones that flop. Caddyshack II was a movie that did not need to be made and the director believed that enough people would enjoy it purely for the nostalgia and not notice the absence of all but one of the key characters. This lack of planning left the audience bored and consequently became one of the worst movies ever made. Your Sequel? Only careful planning and a sufficient amount of time can prevent you and your business from becoming a bad sequel. If a studio decides to make a sequel, you need to pick the “director” who wants to continue the growth of the company and lead it into the future. Budget? Focus on making the business more financially attractive so there is sufficient capital, investors, and/or potential buyers. Script? Engage in continual business and succession planning and make sure your key financial advisors, accountant, and lawyer are also involved. Casting? Work with an industry recruiter, consultant, or advisor to make sure you have the right people in the right roles. After all, your team needs to be as transition ready as your business. Succession planning is ultimately about the transaction of your life and not all sequels are bad. The Godfather II is arguably better than the first movie and is considered one of the best sequels, if not movies, of all time. Do you want to be a Caddyshack II or a Godfather II? The choice is yours and now is the time to get started. “Quiet on the set… Action!” SOURCES: PWC Family Business Survey; Exit Planning Institute; and Pew Research Center. The single largest transaction and transition of your life deserve special attention. Are you planning to exit and sell your business? Business Exit planning is quickly becoming a buzzword in the legal and financial communities. Your professional advisors position themselves to provide tax, risk management, wealth management, and contract preparation services.
Why Succession Planning is Rarely a Success
The numbers are staggering. 10,000 Baby Boomers hit retirement age every day, and 60% of all business owners are over age 55. According to recent surveys by the Exit Planning Institute, PNC Bank, and Kent State, 80% of business owners have no transition plan or have not documented or communicated a succession plan. Furthermore, 80% of these businesses are simply not saleable, nor do they have a proper talent pipeline to continue on. Of the remaining 20% that are sold, 12% will be sold, but not at the original asking price. The study also discovered that 40% of business owners did not have a plan that covers their forced exit (death, disability, divorce or illness). Perhaps Benjamin Franklin said it best: “By failing to prepare, you are preparing to fail.” Even when succession planning is undertaken by business owners, and 98% of them feel it is important, they rarely have a plan in place. When they actually do have a plan, there are several reasons why they rarely succeed… Many think it is not important and choose to focus on the transition, rather than the transactional nature of a business. If it is family business, sometimes the family grows faster than the business, and there are other family dynamics and emotional components at work that delay or prevent an effective transition. Potential future leaders leave the company looking for greener pastures. Owners simply do not adhere to the plan, and many continue to stay long past their expected date of departure. New leaders are ill-prepared to take over, or simply 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 entire future of the business in jeopardy. Politics, time, lack of commitment and fear. Not all hope is lost. We have been a part of many succession plans that have been and continue to be successful, and they all share these characteristics… The understanding that effective succession planning is more than just transitioning to new leadership, there are transactional components at work as well. They take an objective investor’s approach to looking at their business… Is the risk at a low level and is there a potentially high ROI? Operational Efficiencies: Are there efficient processes and procedures in place that can be easily managed and communicated? Financial Strength: Looking at the metrics (ratios, receivables, banking situation), is the company operating at a high level and doing more with less? Transition Ready: 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? Legal and financial preparation? We know from our own experiences, especially in a family business that is often emotionally charged, that succession planning is an extremely necessary, but difficult exercise. In fact, according to the Exit Planning Institute, after transitioning or selling their businesses, owners “profoundly regretted” it after just (12) months. A glut of companies will be transitioning or be for sale for many years to come as the Baby Boomer generation continues to move into retirement. Focus on making your company more transition-ready, and get your advisors (Financial Planners, Attorney, CPA and other key advisors) on the same page to make sure you are financially and legally ready. It is also important to focus on your emotional readiness with a life or executive coach. Also align yourself with a well-trained executive search and business advisory group that can help you find your next leader and management team, as well as help you build your organizational bench strength. Instead of planning to fail, plan a clean transfer to the next generation that has been fully prepared and wants it, or a mutually beneficial transaction or transition to a new owner. After all, succession planning is about preparing for the transition or transaction of your life. Are you ready? SOURCES: PWC Family Business Survey; PNC Bank; Kent State; Exit Planning Institute; and Pew Research Center. The single largest transaction and transition of your life deserve special attention. Are you planning to exit and sell your business? Business Exit planning is quickly becoming a buzzword in the legal and financial communities. Your professional advisors position themselves to provide tax, risk management, wealth management, and contract preparation services. BEST Exit Plan Advisor has been trained to manage your team of tax, legal, business, and financial planners to navigate your exit strategy. Click here for our Special Section for more details and a video on how to get started. If you want to see how prepared you are for transition, take the 15-minute Assessment at no charge: There is one indisputable fact – 100% of owners will eventually exit their business. The Assessment is a multiple-choice questionnaire that does not ask for confidential or financial information. Nevertheless, it is a critical first step in starting the discussion and planning process.
