Succession Planning Rethought
Few issues trouble a business owner more than how they are going to exit a business at retirement, to start another business (if they are a serial entrepreneur), or to pass their interest to children or to minority owners. I’ve had three recent conversations with business owners that revealed some valuable insights – even the best plans require flexibility in adapting to changed circumstances. A steady unemotional hand at the wheel guiding the process is critical. If these forces are in place the owner has a very good chance of achieving the exit they envision.
Business owner one has spent 35 years building a business generating just over $15 million in annual revenue. He has been planning to exit the business for about 8 years and has had a succession plan in place to increase the commitment and responsibilities of minority owners as the founder begins reducing his involvement. The industry he is in is consolidating now and there are great acquisition candidates out there that his firm could capitalize upon. The conundrum for the minority owners is how to finance both the majority owner’s buyout and an acquisition at the same time. The numbers just don’t work to do both. Fortunately, the majority owner is practical enough to realize this and perceptive enough to know that his minority partners need to be positioned for growth to enable him to receive the payout of his interest that he needs. We’ve looked at a range of options for him. We’ve looked at strategies with tax deferred compensation plans, ESOPs, debt financing, hybrid equity and even to selling a minority position to an outside party willing to take and hold passively such a minority position. We have come up with a negotiating strategy he can take to the minority partners that we believe will meet his needs as well as theirs and will sustain the business.
The thoughtful leadership and flexibility of the majority owner is leading to a compromised solution to benefit all parties and achieve sustainable value for the business now and in the future. A more rigid thinking majority owner might have forced the minority owners into an untenable position and caused a disaster for the business risking his future payments/dividends. Note how thoughtful leadership is leading to a resolution that is realistic and beneficial to all parties.
Another recent conversation I had was with business owner two, who is about 48 years old and wants to exit the business when he is about 55. One thing I asked him to think carefully about is the high level of current business valuations. There is no guarantee that 7 years from now when he turns 55 that the market will be as robust. As a result he has begun to look at taking some chips off the table now by selling a minority ownership position to existing employees and then developing internal talent to take over management. Another option would be to sell a minority ownership position to a financially enabled party that has an interest in his industry. We’ve considered whether a sale to existing employees will better insure the ability of the business to fund his buyout in future vs having a financially stable third party take that position. He is very concerned about not disrupting his business nor diminishing the commitment of his employees as the transition takes place. Their skills are in high demand and they can easily leave for lucrative jobs with competitors if they become dissatisfied. The third party option may be financially safer for the majority owner but he has to balance his desire for financial stability with his desire to see some of his existing employees grow into professionals capable of leading the business in future.
Finally, a third business owner with whom I discussed succession planning recently made this observation. “When I started my business 9 years ago I wanted to exit in 5 years. Unfortunately, year 4 of my startup was 2008 when the economy was in a deep recession and business valuations were dreadfully low.” Exiting as he had planned in 2009 was impossible at anything resembling a reasonable price. Fortunately, he was able to survive the recession and is now in position finally to exit at a reasonable value. As he said to me “I knew my plan had a downside risk to it and the worst case scenario did take place.” When the recession struck I had to rethink what my financial needs were, how I was going to leave the business I was selling in good enough shape to survive a change in ownership and what assets I could place into my retirement plan vs those I was going to put into my next venture.
The consensus I got from these three owners is that succession planning is not something to be left to chance. Putting a written plan together will crystalize your thinking and point out areas of highest risk to you. When you’ve identified those risks you have the blueprint from which to begin the process of minimizing them through a good succession plan. Every plan, at every age and size of business and business owner, there are complex financial choices and alternatives. As I said at the beginning, a clear eyed vision of what you want to achieve is required to navigate the economic and competitive situation that business owners face in succession.
Doug Kennedy has extensive knowledge and hands-on experience in building robust foundations for family offices and serving the role of trusted advisor. He performs business advisory services and financial consulting work for a variety of family-owned businesses from start-ups to mature successful enterprises. His experience has been spent in family dominated publicly owned companies, high net worth individuals, estate planning, wealth management, succession planning, leadership transition and risk management.
If you would like to speak with Doug, please use the comments section to make a request.