Michael Beck

There’s No Need for Succession/Exit Planning

There’s not really a need for succession or exit planning. Basically, a few months prior to your planned departure, contact a business valuation expert to determine the value of your business, then either find a buyer or choose a successor, engage an attorney to draw up the necessary paperwork, execute the papers, get paid, and transition into retirement. It’s all pretty straightforward.

In fact, there are only a handful of reasons where that plan may not be sound. Here are the issues, the consequences of those issues, and the remedy for each.

REASON #1: BUSINESS VALUE

THE ISSUE:
The value of your business ends up being below (and sometimes, far below) the value you need or want.

THE CONSEQUENCE:
The consequence of this is self-evident. The business won’t sell for enough money.

THE REMEDY:
There are many factors that go into determining the value of a business – things like profitability, profit trend, strength of the remaining leadership, effectiveness of systems, and customer diversification. The challenge is that each one of these factors takes time to impact the value of the business. In fact, they often require several years to make a difference.

The remedy, therefore, is to have your business valued two or three years in advance of your planned retirement in order to determine whether changes need to be made. Use a qualified business valuation professional to give you an unbiased valuation of your business. Doing this in advance will give you the time to implement any changes and increase the value of your business.

REASON #2: TRANSACTION STRUCTURE

THE ISSUE:
There are a number of fundamentally different ways a transaction can be structured.

THE CONSEQUENCE:
If you choose the wrong structure to your succession or exit, value can be negatively impacted, plus you may end up paying far too much in taxes. In addition, it’s not only about choosing the best structure but the timing as well, because a number of these strategies must be put into motion long before the actual transaction takes place. The consequence of waiting until you want to retire before you address this issue is that you won’t be able to consider many of these options, resulting in a lower business value or a higher tax bill.

THE REMEDY:
The process starts with understanding your financial needs for retirement. Next, the value of your business needs to be determined. And then, the tax implications need to be estimated.

Once you know where you stand, the best structure can be determined for the transaction and transition, and the appropriate measures can be put into place to minimize taxes and maximize cash. An experienced exit/succession professional can help you determine whether an internal sale, external sale, ESOP, trust, or some other structure would best serve your interests.

REASON #3: COMPANY SUCCESSOR

THE ISSUE:
You know who you’d like to choose as your successor, but grooming someone in the mechanics of the business does not ensure leadership development or their success as an owner.

THE CONSEQUENCE:
If a successor isn’t properly prepared to take over as an owner, the consequences can be disastrous. Poor judgment and poor decisions can quickly undermine the success of a company. Poor leadership can cause an exodus of key people from the organization. And a poorly run company will cause customers to leave.

Obviously, the consequences of a poorly groomed successor are declining revenues, reduced profits, and diminished cash flow, which result in the inability to make purchase payments to you. If that happens, it will require you to come out of retirement, rebuild the company and (hopefully) find a new buyer.

THE REMEDY:
A successor needs to master a number of leadership competencies, hone his or her judgment, refine strategic thinking, and adopt an owner’s mindset. An objective assessment should be done followed by leadership development tailored to the results of that assessment. This is often a one to two year process. This development requires coaching from an experienced executive coach and mentoring from you, the owner.

REASON #4: THE UNANTICIPATED

THE ISSUE:
You’re confident in how you’ll orchestrate your retirement from the business, but then the unexpected happens – death, disability, divorce, dissolution, etc.

THE CONSEQUENCE:
If your exit from the business is triggered by anything other than a voluntary sale, then the successors, survivors, family, employees and everyone else will suddenly be thrust into a very difficult situation. If you suddenly have a stroke, it probably will not occur at a convenient time (it never does) and will happen without warning.

If you haven’t done any planning in advance, the value, the transition, and the future of your business will all be thrown into chaos and uncertainty. The fitness of the business will be jeopardized and the consequences can be devastating.

THE REMEDY:
As with each of these reasons, business owners who plan ahead have better results than those who don’t. A well thought out and well structured succession/exit plan will address not only a planned event, but unplanned events as well. The consequences of an owner’s death, disability, stroke, etc. prior to retirement can be mitigated by having a comprehensive plan in place, a well prepared successor in place, and the proper funding mechanism in place, all well in advance.

CONCLUSIONS:
On the surface, it seems like planning an exit or succession is fairly straightforward and can be accomplished in about three to six months. But the truth is that if you want to maximize your company’s value, minimize the taxes you’ll pay, maximize the cash you end up with, and ensure your company continues to thrive, you should start planning and taking action several years in advance of your exit. Start to lay the groundwork now. Waiting only limits your options.

If you’d like help with any of these issues, I can refer you to qualified professionals in your vicinity. I’ve built a network of experienced professionals around the country who can help. Just give me a call and I’d be happy to recommend some people. Michael Beck, 503-928-7645, mbeck@elicitingexcellence.com, www.ElicitingExcellence.com

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Two Children. One Successor. Now What?…

It’s a challenging scenario. An owner has two children (or two executives) who each want to run the company after he or she retires and, of course, each child feels they are best equipped (or most deserving) to run the company. But there can only be one person at the top. (Having co-presidents or 50/50 owners can be a disaster.) Additionally, it’s important that the company and its cash flow continue to grow, since in most cases the price/value of the business will be paid out over time. And finally, besides needing the company to thrive, the issue of family dynamics comes into play. Because of these issues, it’s essential to get this decision right and to handle the implementation effectively. Choosing one over the other, if not handled properly, will surely lead to hurt feelings, resentment, and tense holiday dinners.

Here are the four ways to resolve this situation…

1. Let Them Sort it Out Themselves
Allowing them to resolve who should be in charge may seem like the smart approach because you (and your spouse) don’t have to take sides, thereby avoiding any resentment towards you. But it doesn’t work that way and you run the risk of the business failing.

Although it may seem like you’d avoid resentment, the child who “loses out” will likely resent the fact that you didn’t believe in them enough to choose them over their sibling.

And though it may seem like it should be an issue of “survival of the fittest”, it may very well be survival of the most hurtful, most manipulative, or strongest willed – none of which ensure that he or she has the vision and leadership qualities needed.

All in all, this approach is not very effective.

2. Choose One Over the Other
This can be the best solution if it’s handled correctly. If you can be objective about who should run the company, not only will you maximize the likelihood that the business will thrive, but you’ll effectively make the case for your decision.

This approach starts with an objective assessment of each person’s leadership competencies. The assessment will provide good insight into how each leader is viewed by those around them. In addition to the assessment, you should have each of them express their vision for the company going forward. Asking for their vision of the future will help you determine whether they have good judgment and if they’ve been giving thought to growing the company. Once those pieces are completed, it is often self-evident who the stronger succession candidate is.

Sometimes the person you’ll pick will be ready to take the reins right now, but many times, they will still need further development to be most effective. Either way, it is generally fairly straightforward to make the case for your decision in a dispassionate, objective manner, thereby minimizing any feelings of resentment. And you’ll have chosen the one most likely to succeed.

3. Split Responsibilities Between the Two
This approach is a variation of the second approach and can also be a good one if the siblings aren’t battling one another. Sharing responsibilities based on their respective strengths can be a smart strategy. The only problem is that ultimately, there needs to be one decision maker. This approach will also still require you to choose which child has final say, so you’ll still have to name one as the person in charge.

4. Sell the Business to an Outside Party
Selling your company to a third party ensures that you get paid the full value of your business. It avoids having to choose between two children and it may sidestep feelings of resentment.

There are, however, two potential issues with this approach. One is that there may still be feelings of resentment about not having confidence in one or the other of them to have selected them as successor. The other issue, of course, is that the business will no longer be in the family and your legacy will be lost.

In summary, the best way to handle the situation of having two or more potential successors is to make (and justify) your decision as objectively as possible. Following this strategy will minimize feelings of resentment and maximize the likelihood that the business will thrive, you get paid the full value for the business, and your legacy continues.

The Four Stages of Successor Development

In order for a successor to successfully take ownership of a company and lead it into the future, he or she must transition through four stages of development. If a successor takes over a company and has only mastered the first two stages of development, he or she is doomed to fail, because they’ve only mastered the mechanics of the business. In fact, studies show that 70% of successions fail! If, on the other hand, a successor is effectively developed through all four development stages, growth and profitability are maximized, employee turnover and customer loss are minimized, and the owner gets paid the full value of the business.

Stage One: Worker/Contributor
This is the stage where a successor learns the mechanics of a business. In this stage, successors become good at getting the work done. It’s about gaining knowledge of how the products and services of a business are created and delivered. Competencies in this stage involve acquiring technical and industry knowledge, along with improving technical skills. Improvement in this stage comes from technical training and hands-on experience.

Stage Two: Manager
This is the stage where a successor learns how to get work done through others. He or she learns to oversee projects and manage resources. Although they may still be doing some of the work themselves, their main tasks are to provide guidance to others and to have responsibility for overall production, productivity, and quality. Improvement in this stage comes from things like project management training, general management training, and hands-on experience.

Stage Three: Leader/Executive
This is the stage where a successor learns to lead rather than manage. It’s the point where people skills become more important than technical skills and knowledge, and an entirely new set of competencies comes to the forefront. In order to be an effective leader/executive, a successor must improve his or her communication skills and learn the art of influencing others in order to get buy-in for their plans and ideas. They must learn to foster teamwork and collaboration along with the ability to resolve conflict in a constructive manner. Additionally, a strong leader appreciates the need to develop others and masters that ability. And finally, in order for a successor to be effective as a leader, he or she must begin to enhance their executive presence. A leader with good executive presence is better able to instill confidence, build trust and earn respect. Improvement in this stage does not come from training. A person cannot become a better leader by simply reading a book. It requires the breaking of old habits and forming new ones. It requires the revealing of blind spots and limiting beliefs. And it requires a deeper understanding of human nature. These competencies are best honed though coaching and mentoring – all of which take time.

Stage Four: C-Suite/Owner
This is the stage where a successor learns how to lead an organization. It’s the stage where seeing the bigger picture becomes their job. In order to do this, he or she must hone their strategic thinking – moving beyond developing tactics to developing directions for the company that address fundamental problems or capitalize on opportunities. And it requires sound judgment in order to make good decisions. A successor at this stage must be able to develop a vision for the organization and have the ability to gain buy-in for that vision. In order to achieve that, he or she must have both organizational awareness and external awareness, looking beyond the confines of the company. The final piece in this stage is for the successor to develop an owner’s mindset. Up to this point in their career, most successors have only ever been an employee. The issue is that owners see things differently than employees. In order for a successor to shift from an employee mindset to an owner mindset, they need to change their perspective from short-term thinking to long-term thinking, from self focus to organizational focus, from internal focus to external focus, and from narrow/silo thinking to big picture thinking. Improvement in this stage is developed over time and occurs through coaching and mentoring.

Strategies for Successful Development
For purposes of this article, let’s assume that the successor has successfully mastered the first two stages of development. In other words, they’ve gained strong knowledge of the technical aspects of the industry and have gained experience managing projects.

In order for a successor to master the second two stages, he or she must be coached and mentored. If the owner takes on this task, they must adopt a “coach-like” style of leadership. This is a style that helps people grow and develop. The most effective means of coaching is to ask questions rather than give answers and these questions fall into two categories. The first set of questions gives us insights into the other person and the second set of questions allows us to give the other person new insights. The only way to know what questions to ask in order to give them new insights is to first discover where their thinking, judgment, and/or perspective is incorrect. That’s what the first set of questions accomplishes. This coaching will help them develop the necessary leadership competencies, strengthen their executive presence and improve their ability to think strategically.

The owner must also mentor the successor. This is done by allowing the successor to make increasingly difficult decisions. Only by guiding their thinking can a successor’s judgment be honed. Start with allowing them to make decisions that aren’t critical. In other words, a misstep won’t harm the company. As their judgment and thinking improves, have them participate in decisions which have greater impact.

The owner must also share the mistakes they’ve made in the past and the lessons learned over the years. Many times, lessons learned are not self-evident.

The Bottom Line
In order for a successor to effectively lead an organization into the future, they need to transition from contributor to manager to leader and ultimately to Owner. It is essential that development does not stop at mastering the mechanics of the business.

A good place to start is with our free Successor Readiness Questionnaire. It can give you a sense of how ready your successor is to take over.

If you’d like help assessing and/or grooming your successor, please contact me. Our conversation can help determine the preparedness of your successor and whether our services would be a benefit to you.

The Time-Value of Business Valuation

An important goal in any exit or succession plan is to develop the business in a way that maximizes its value. But the truth is that the value of a business is only realized if the owner actually gets paid that money. And therein lies the difficulty…

Many times with an internal sale to a family member or key employee, the buyer doesn’t have the cash to pay the full value up front. Therefore, the owner receives the majority of the business’ value over time, paid with future cash flow. The time-value of a business’ value is analogous to the time-value of money. In other words, money in hand now is worth more than the same money received later. To account for this timing issue, a succession plan is often structured so that the payout over time is higher than if a lump sum were to have been paid up front.

But most succession plans are structured assuming that all payments will be made even though studies show that about 70% of all successions fail! Therefore, the likelihood of future payments not being made must be taken into account when determining a business’ real value.

There are four ways to address this issue. One is to try to get a commercial bank to fund the sale in order to shift the risk. Unfortunately, many times this route is impractical. The second strategy is to front-load the payments, receiving the lion’s share of the value as soon as possible. Typically, this route is also impractical because it generally cripples the cash flow and working capital of the company, virtually ensuring that it will fail and be unable to finish paying the owner.

A third route is to have equal payments, but charge a much higher premium to offset the risk of non-payment. In other words, treat it as a high-risk loan. Like the previous approach, this generally impacts cash flow too heavily and jeopardizes the success of the company.

Therefore, the fourth strategy is the best solution if you’re serious about ensuring the likelihood that the full value of the business is realized by the owner. This fourth strategy is to reduce or eliminate the risk of failure. One approach to reducing this risk is to have the owner remain involved until he or she is paid in full. But of course, this approach defeats the whole purpose of selling the business.

A much better approach to reducing risk and ensuring success is to develop the successor more effectively. Most owners help their successor master the mechanics of the business. That’s not the problem. The problem is that there are a couple of critical competencies that won’t be addressed if grooming stops with the mechanics. First off, learning the business doesn’t necessarily hone leadership skills. Strong leadership skills are essential for success. Managing can keep a business running smoothly for a while, but leadership skills are needed to successfully take a business into the future – things like good judgment, strategic thinking, conflict resolution, and the ability to influence others.

The second critical competency is the need for the successor to adopt an Owner’s Mindset. Typically, up to the point of the sale, a successor has only been an employee. But owners and employees think and act differently.

Employees tend to think narrowly. They usually focus on the task at hand and/or on their specific domain of responsibility (operations, finance, engineering, etc.). In contrast, an owner needs to consider the bigger picture and how his or her decisions impact each aspect of the business.

Employees also tend to think short-term. Their focus tends to be on current matters, current revenues, current expenses, and current profits. They also tend to be reactive. In contrast, an owner needs to 1) consider both short-term and long-term success, 2) learn to make decisions without having all the information, and 3) must learn to balance risk and reward. (Rarely is a decision about the future risk-free.) And owners tend to be proactive.

And finally, employees know that if they make poor decisions or the business doesn’t do well or they become dissatisfied or they lose their job, they can always find a new job elsewhere. Owners, on the other hand, understand that failure is not an option. There is no “Plan B.” Owners understand that the business is their future, and this understanding must color their decisions and their actions.

When a successor’s leadership competencies aren’t developed and they haven’t adopted an Owner’s Mindset, he or she can’t effectively guide an organization. In the absence of these competencies, the future of the company becomes less certain and the future cash flow is put in jeopardy.

Please don’t throw an inadequately prepared successor into the role of leading a company. Whether you use our services or some other solution, bring in a professional to help – someone skilled in leadership development and experienced in working with successors. If you’d like our help developing a successor, please give us a call to discuss your specific situation. We offer executive assessments and executive coaching, all designed to help successors succeed and owners get paid.

Misuse of “The Hammer” by Leaders

I’ve never met an executive who thought they were a poor leader. Most will say there is always room for improvement, but that they generally do a good job. And yet… we all know people who are poor leaders!

These leaders often feel that they know what should be done and how it should be done. So they adopt a “command and control” style of leadership, “guiding” the people around them. If they aren’t successful at getting their way they “pound” on them – basically ordering them to do what they say. I call it “using the hammer”.

This approach is appropriate for urgent situations or emergencies, but is rarely effective in most other circumstances. At best, when a leader takes this approach, they simply get compliance from their people. At worst, they elicit passive-aggressive behavior. And to compound matters, the results gained form compliance are weak compared to those gained by a committed workforce.

In essence, they’re treating adults like children. This style of leadership demonstrates that they don’t trust or respect those around them. It shows that they don’t value them as professionals and it generally causes disengagement. Micromanaging is a common variation of this style of leadership.

If a leader really wants to bring out the best in people, he or she needs to treats adults like adults and professionals like professionals. Effective leaders learn how to influence and persuade people to buy into their ideas and suggestions. Effective leaders give people autonomy, allowing them to do their work in their own way.

That’s not to say that these leaders accept mediocrity. Far from it. In fact, this approach – when done correctly – allows a leader to hold people more accountable and it allows them to hold people to a higher standard of performance.

Besides, taking this approach doesn’t take away any power from the leader. A leader always reserves the right to use “the hammer” and tell someone exactly what he or she wants done. It should only be used when a leader’s powers of influence fall short and/or when someone’s judgment is flawed. A leader always has the prerogative of dictating what should be done and how it should be done. But using the hammer is a last resort when nothing else works.

Everyone feels they have something to contribute and want to be heard. The key to bringing out the best in people is to value and respect them. Eliciting excellence is the essence of exceptional leadership.

If you’d like help in refining your leadership effectiveness, please call. We offer assessments and executive coaching – all designed to boost your leadership effectiveness.