Succession

Every Owner Has a Plan Until…

Mike Tyson, the heavyweight boxer, was quoted as saying, “Everyone has a plan until they get punched in the mouth.” Regardless of what you may think of him as a boxer or a person, it was a great observation.

It doesn’t matter whether we’re talking about boxing or business, the truth is that owners all have a plan for a transition until they get hit with a setback. Some will give up after being derailed, but others will take a step back, correct their course of action, and find a way to succeed. Giving up on a course of action is not the same as giving up on a goal.

Having a strong attachment to the process with which to achieve a goal often undermines our success.

Let’s look at the typical transition options, the potential setbacks, and how to recover from a setback.

Typical Transition Options:
Generally, owners have two practical options – an External Sale (Exit) or an Internal Sale (Succession). (The other option is to close the doors and sell the assets.) An Exit is generally a sale to an Individual Buyer or it’s some form of Strategic Acquisition (M&A/Investment Bank/Private Equity). In contrast, a Succession is a sale to a Family Member, a Key Executive, or via an ESOP (Employee Stock Ownership Plan). A number of these options can be the right path for an owner, depending on the nature of the business and the needs of the owner. The problem is that many times, things don’t go as planned.

Potential derailers for a planned External Sale
Circumstances that can derail an Exit include:

Can’t find a buyer or attract capital – This can be due to a surplus of businesses for sale or to the nature of the business. The greater the surplus of sellers, the more selective buyers can afford to be. Additionally, the more dependent on the owner and his/her relationships, the less attractive the business.
Price too low – This can also be due to a surplus of businesses for sale or it can be due to business valuation issues like customer concentration, weak leadership, market concentration, etc.
Unacceptable terms – Sometimes buyers require an owner to stay active in the business for an extended period of time and or defer payment of monies pending performance.
Health issues (yours or a family member) – Clearly, this situation is unexpected, and a sale would be undertaken under pressure, which would result in a loss of leverage.

Potential derailers for a planned Internal Sale
Circumstances that can derail a Succession include:

No qualified or interested successor – Either the person you had in mind to take over the business doesn’t want to, or you don’t have confidence in the person who wants to take over.
More than one interested family member or executive – You have more than one person who wants to be the successor and it creates conflict – sometimes significant conflict.
Too small for an ESOP – You like the idea of creating an employee-owned company, but the cost is too high and/or there aren’t enough savvy leaders to take charge.
Health issues (yours or a family member) – Clearly, this situation is unexpected, and a transition would be required before a successor is ready.

How to Reduce the Chance of Your Plans Getting Derailed:
The best approach to planning a transition is to be proactive, well in advance of your anticipated departure. Start by pulling together a team of professionals sooner than later. Their expertise can help you choose the best exit strategy for your situation, identify and resolve potential issues, and refer you to people with any additional expertise if needed.

• Wealth Manager
• Tax Planning Attorney
• Successor Recruiting
• Successor Development
• Succession Attorney
• Private Equity Firm
• M&A Advisor

• Investment Banker
• Exit Planner
• Executive Coach
• Estate Planning Attorney
• Commercial Banker
• Business Broker

If your goal is an external sale, consider having a preliminary Quality of Earnings Report done along with a Quality of Leadership Report. These two reports will highlight any shortcomings and/or impediments in advance of a sale so they can be addressed before going to market. Additionally, consider selling sooner than later to avoid the surplus of Boomer-owned businesses coming to market and/or to avoid being forced to retire due to health issues.

If your goal is an internal sale, ensure you’ve identified your successor well in advance and make sure they want the role. (If there is no one, then start the process of recruiting a potential successor as soon as you can.) Once that’s done, start working on developing that person. Develop their business savvy, their leadership effectiveness, their strategic thinking, and their owner mindset. If more than one successor will be involved, objectively assess them and decide how to split/share responsibilities.

How to Recover from a Setback on an External Sale:
Basically, there are two paths to recovering from a setback on an external sale. Start by attempting to make the business more attractive. If possible, address the issues that caused the business to be less attractive, caused it to be worth less than you hoped for, or caused the terms to be undesirable. If that can’t be accomplished, then switch to an internal sales solution by choosing or finding a suitable successor and grooming them to take over.

How to Recover from a Setback on an Internal Sale:
If your plan to have a particular person take over the business fails, re-evaluate and assess alternative successors and/or start the process to recruit a successor from outside the company. Once you’ve chosen someone, begin grooming them to take over.

By the way, if you want to accelerate the development of your successor, consider bringing in a professional executive coach. Having an objective, confidential sounding board can help them gain new perspective and develop the skills they need to succeed.

Planning on Selling Your Business? Think Again…

Everyone’s heard about how Baby Boomer business owners will be retiring and the wave of business successions/exits that will occur as a result of those retirements. But there’s a problem that almost no one is discussing. Our research clearly shows that there aren’t enough buyers for all those businesses. Here’s why and what you can do about it.

The SBA reports that there are roughly 6,000,000 small employers in the U.S. Of those 6 million businesses, approximately 3,600,000 are owned by Baby Boomers and about 2,400,000 are owned by GenX’ers. Based on the US Census population statistics, this means about 4.5% of Boomers own a business and about 3.0% of GenX’ers own a business. Human nature being what it is, we expect the percentage of GenX’ers who want to own a business to also rise to 4.5% as they get older. None of that is especially surprising – until you think about it a bit more. And then it becomes alarming. It becomes alarming because that rise in GenX owners from 3.0% to 4.5% represents only 1/3 of the Boomer businesses that will be for sale.

The result is that 2/3 of all Boomer businesses won’t find an individual buyer!

But what about strategic acquisition and private equity money? There’s lots of money looking for a home, right?

There are always companies looking to acquire or merge with businesses that complement or expand their core business. After all, the acquisition is considered “strategic” because it expands their market share, affords economies of scale, or adds products and services that dovetail with or complete their current offerings. But only the most profitable, highest regarded, or fastest growing businesses will be strong candidates for a strategic acquisition at full market value. The reality is (and always has been) that most companies will not be good candidates for strategic acquisition.

When it comes to private equity, pretty much all private equity investors are looking for opportunities with high profit growth potential. And as we know, most businesses are more about steady growth and consistent profits. They just don’t pencil out for that big, private equity payday.

Historically, between M&A deals and Private Equity deals, only about 15-25% actually close. Even if we’re optimistic and assume 25% of the available businesses can attract private equity money or a strategic buyer, it leaves a full 50% of boomer businesses without a buyer or acquirer! (75% of the 2/3 noted above)

If owners REALLY want to sell their company to an outsider, they should work with an experienced Transition Specialist, M&A Advisor, Investment Banker, or Business Broker. It will maximize their chances of getting sold. In addition, they should get preliminary Quality of Earnings and Quality of Leadership reports done. These reports will highlight any weaknesses that need to be addressed before going to market, thereby increasing their chances of attracting a buyer and closing a deal.

So, where does that leave owners who can’t find a buyer or attract money? Here are the five options open to them:

“FIRE SALE” ACQUISITION
Businesses whose profitability and growth are weak or who aren’t quite a perfect fit for an acquiring company may still be candidates for acquisition. The problem, however, is that they won’t be able to command their full market value. Because they’re not as attractive to a strategic buyer and because there will be so many businesses on the market, the only incentive to complete a deal will be to lower their asking price – sometime significantly.

FIND A SUCCESSOR
One of the better options for many businesses will be to recruit and develop a successor, and then sell the company to them at full price. Some banks may be willing to fund a portion of the buyout, but the majority of internal sales will be paid (in part or in full) out of future cash flow. Consequently, it is critical to find a successor as soon as possible and ensure they are well-prepared to be an effective leader and a successful owner. It generally requires one to two years of development to hone someone’s leadership capabilities, their strategic thinking, and their judgment. Without that development, you run the risk of the business not being able to make those buyout payments.

KEEP THE BUSINESS
A variation of selling to a successor is to bring on a successor to run the company but not sell the stock. This option allows the owner to draw out the business’ value from the company while still owning it, but without needing to run it on a day-to-day basis. It requires finding and developing a strong successor, and then rewarding him or her for good performance.

CREATE AN ESOP OR AN MBO
In the absence of a strong successor, an option that will also yield full market value is to set up an Employee Stock Ownership Plan (ESOP) or a Management Buyout plan. This approach can increase employee loyalty and productivity, ensure business continuity, and gain some tax advantages. These solutions can be effective, but require one or two years of planning, along with the training and development of the people who will be directing the organization. Additionally, it can be expensive to establish an ESOP and is therefore not a practical option for most companies.

CLOSE THE BUSINESS
If a business can’t find an individual buyer, is not a candidate for acquisition, has no successor and isn’t able to structure an ESOP, the only course of action will be to close the business and sell off the assets. Obviously, this is the least desirable outcome. The owner will receive pennies on the dollar and the livelihood of all the employees and their families will come to an end.

We believe all too many businesses will be facing this stark reality if they don’t put plans in place at least two to three years in advance of retirement.

THE BOTTOM LINE
The bottom line is that if your businesses isn’t in high demand and you’d like to sell it for a reasonably strong price, the best course of action is generally going to be to recruit and develop a strong successor.

If you’d like help recruiting, assessing, and/or developing a successor for your business, please contact us. It’s what we specialize in.

Successor Insights: The Need for a Sounding Board

There’s no question that a successful business owner knows his or her business better than anyone else. And as a consequence, there’s no one better to help a successor learn the business. But there are potentially several problems that occur when an owner is the only one to help a successor develop.

The first issue pertains to leadership. Learning the mechanics of a business doesn’t really help hone leadership skills. Although people generally do respect a leader’s knowledge and technical skills, that degree of respect only goes so far.

For people to fully trust and respect a leader, that leader needs to earn that trust and respect. Trust and respect aren’t automatically given because of someone’s title.

In order for a leader to earn trust, he or she needs to demonstrate that they have integrity. In other words, they do what they say they’re going to do and are the kind of person they claim to be. And, in order for a leader to earn respect, he or she needs to treat people with respect in both word and action. For example, a leader needs to treat people like people rather than like things. And they need to treat adults like adults instead of like children.

The second issue pertains to strategic thinking. Knowing how to do things really well simply means a successor has mastered the mechanics – the systems and tactics – of the business. If they don’t learn to think strategically, then several things tend to happen.

One result of not thinking strategically is that improvements will tend to be small, resulting in only modest gains. A second consequence is that a successor will tend to develop tactics that they feel are “strategies”. This also produces results that are mediocre. But the third consequence is the one that is most detrimental. They will develop strategies to address symptoms rather than underlying problems. The result of addressing symptoms instead of problems is that it almost always creates more challenges that cause a decline in revenues and profits.

The third issue pertains to blind spots. If a successor only gets guidance from an owner, they tend to end up with “group think” along with the blind spots that accompany it. Group think is what happens when people think “this is the way we do it around here”. The problem with having blind spots is that a successor can’t see what he or she is missing. Regardless of experience, intelligence or education, we all have these blind spots.

Typically, the only way to eliminate blind spots is to get outside perspective. Someone needs to point them out to us. If we don’t get past our blind spots, we miss opportunities and make poor decisions.

The solution to improving leadership competence, enhancing strategic thinking and eliminating blind spots is to have an unbiased sounding board. Someone who can offer outside perspective and help develop the needed competencies.

The Successor Litmus Test

A well-prepared successor is essential for a smooth transition and is critical for continued growth and profitability. The question then, is how do you determine whether a successor is ready to take over? What is the “Litmus Test” that will reveal their degree of readiness?

The answer is that there is none.

There is no one “test” that will reveal their preparedness. Rather, there are several things (you can call them tests if you like) that will reveal just how competent they really are. Here are a few suggestions you can use to evaluate your successor:

Vision: Ask your successor what his or her vision is for the future of the company. Do they talk about maintaining or do they talk about growing? Do they talk about changes they’d make? Do they talk about the company’s culture? Do they have an eye on the customer and the competition?

Any and all of these issues can and should be an essential part of someone’s vision for the future of the company. By listening to what they talk about and listening for what they don’t talk about, it will reveal whether they’re beginning to think like an owner.

Strategy: When an issue arises within the company, ask your successor how they would resolve it. Help them to differentiate between problems and symptoms. Help them differentiate between strategies and tactics.

If they attempt to “solve” a symptom, the solution almost always makes the situation worse. Help them to understand that before a strategy can be developed, the underlying problem must first be identified. Once the true problem is uncovered, the best strategy almost always presents itself. Helping them understand these insights will help keep them from developing poor initiatives.

Decision-Making: Making sound business decisions is key to the future of the business. Good decision-making requires business savvy, sound judgment, and the ability to see the bigger picture.

Have your successor start by making less critical decisions. As he or she demonstrates competence, allow them to participate in decisions that have a greater impact on the company. Coach and mentor them on how to make better decisions. Only by helping them make course corrections can you hone their decision-making abilities.

Judgment: There’s only one real way to test their judgment. The one true test of judgment – after all the other development has taken place – is to leave.

Ask yourself how long you’d be comfortable being away from the business. And then leave. At first, it may be for a few days. Then a week. At some point, it may be that you can stay away for two weeks or even a month. The truth is that at some point, when you retire, you will be away from the business all the time.

If you’re not comfortable with staying away for an extended period of time, it’s generally due to one of two things. Either your successor isn’t yet ready to take over, or you aren’t prepared to let go. Either way, something needs to change if you want a smooth and successful transition.

If you’d like help preparing your successor, please give us a call. We specialize in successor assessment, successor development, and successor recruiting.

5 Strategies for Effective Successor Development

If you’re planning on selling your business to a successor (family or key executive), developing them as thoroughly as possible is essential. Not investing the time to properly develop them can lead to retirement delays, frustrations, missed payments or worse (like having to come out of retirement and salvage things).

After working with leaders for the last 20 years, we’ve determined that these are the five smartest things you can do – above and beyond teaching them “the mechanics” of your business – to maximize the likelihood of success.

1. Get an Objective Assessment
Let’s face it, we all have blind spots. And our blind spots cause us to miss things – especially when it comes to successors because we’re too close and have a lot riding on their success.

In addition, although you no doubt have many years of experience, your opinion is only part of the equation. It’s critical to find out how others view him or her, since they’ll be the ones who will either follow the successor’s lead or will choose not to trust and respect them.

The smartest way to evaluate a successor is by conducting a 360° assessment. This assessment solicits feedback from people all around them (you, peers, direct reports, etc.). The report generated by an objective 360°assessment will highlight their strengths and their weaknesses, which will provide you with guidance on how to further develop them to be more effective.

2. Have Regular Developmental Discussions
Successors can’t be trained. They must be developed over time. In other words, if successors could be trained, they could simply read some books and attend a workshop or two and become a better leader and an owner. It doesn’t work like that. For someone to become more effective as a leader and owner, he or she must break old habits and form new ones. They need to improve their interpersonal skills, learn to think strategically, and become effective at influencing others. In addition, they have their own blind spots and can’t see what they’re missing nor can they see where they’ve gone wrong.

That’s why, for successor development to be effective, it’s important to have developmental discussions once a week or at least twice a month. During these discussions you should talk about things that happened since your last meeting with them and suggest ways they could have handled things differently or more effectively. It’s an ongoing process and usually takes about 6-12 months to get the results you want.

3. Help Them to Think More Strategically
I’ve seen it over and over again. Leaders looking to increase profits develop a strategy to get better results. Except the so-called strategy they develop is not really a strategy at all. It’s just a goal. Or a tactic. Or sometimes it’s simply a platitude – a nice-sounding, but meaningless statement.

Regardless of whether they developed a goal, a tactic or a platitude, the results are always the same. The so-called “strategy” is never realized. No amount of encouragement, accountability or table pounding will lead to achieving the desired results. Only a true strategy stands a chance of achieving significant results.

In order to help a successor think more strategically, two things must happen. First, they need to understand the distinctions between strategies, tactics, goals, and platitudes.

A good strategy addresses a problem or an opportunity. Help your successor learn the differences between strategies and tactics.

And then they need to learn to differentiate between problems and symptoms. A strategy developed to address a symptom almost always produces weak results and always causes new issues to arise, thereby compounding the situation. The key, therefore, is to teach your successor how to uncover the problem or problems causing the symptoms.

4. Help Them to Be More Persuasive/Influential
Mastering the ability to influence others is critical to the success and effectiveness of a leader. A strategy, no matter how well thought out, will get mediocre results if there isn’t strong buy-in. A leader will always get compliance because of his or her authority. But compliance and commitment are two different things.

How do you influence people? How do you change their perspective, so you get buy-in? The most effective means of influencing others is by asking good questions and the use of analogies.

Asking good questions is an art. It took me many years to master it, with lots of practice and plenty of missed opportunities. Help your successor learn to ask questions that will change someone’s perspective. The right questions will give them insight into how the other person thinks and give your successor the needed insights to shift the person’s thinking.

The second tool for influencing people is through the use of analogies. Analogies are an excellent vehicle for bringing someone around to your way of seeing things. Help your successor see that using an analogy can help people “see” and “feel” the concept they’re talking about and does it in such a way as to keep them from becoming defensive.

5. Refine Their Decision-Making Abilities
As every owner know, it’s up to them to make the final decision on every significant issue. In order for your successor to make smart decisions, you need to groom him or her in several areas.

Often, decisions must be made without certainty about the future. Therefore, you need to help them improve their judgment and learn to balance risk and reward. They need to be savvy about business in general and understand financial statements. Since your successor has probably only ever been an employee (and never an owner), you need to help them think like an owner, see the big picture, and balance long-term and short-term needs. And finally, you need to help them learn the wisdom in getting outside perspective. It will help reveal blind spots and give them objective insights.

Properly developing a successor is important. The future of the business depends on it, the livelihood of your employees depends on it, and your retirement plans depend on it.

If you’d like help developing your successor, please contact us. It’s our specialty.