Are you holding out or hanging on?
SUCCESSION PLANNING CAN PREVENT YOUR BUSINESS FROM BECOMING A STATISTIC
It’s been called the “silver tsunami.”
According to Project Equity, a research group that promotes employee ownership, nearly half of all businesses in America with employees are owned by members of the Baby Boom generation, those born between 1946 and 1964. More than one-third of those owners are 65 or older, and that number swells daily.
The 2.3 million businesses owned by this generation employ about 25 million people and generate annual payrolls of just under a trillion dollars. And according to one estimate, more than 85 percent of these businesses have no succession plan in place. In other words, these owners have no formal plan for how they will transfer ownership of their business after they retire.
A potential recipe for disaster.
What’s Your Exit Strategy?
Every business owner needs a sensible exit strategy, one that realistically engages with market realities. And the earlier it’s in place, the more likely the owner is to derive full value from his or her life’s work.
The worst-case scenario? Hundreds of thousands of businesses that are up for sale are destined to find no buyer and will have to be shuttered. In fact, only about 20 percent of businesses listed for sale actually ultimately sell. And statistics validate that it’s even less likely that the business will find a family member of the next generation to assume ownership. All of which could lead to tragedy. That retirement nest egg you were counting on in the form of the buy-out or sale of your company could simply vanish.
Why do so many business owners put this off? Simple: for the same reason so many individuals fail to prepare and update their wills. They find it difficult to come to terms with their mortality, or in the case of business succession, their retirement.
Business owners tend to be strong-willed. Many have a terrible time letting go of responsibility. After a lifetime spent running their businesses, many owners struggle with being replaced, accepting the idea that someone else could be groomed to take over their role and understand their industry as well as they themselves do. This is why they often resist finding a buyer or identifying their eventual replacement. And the longer they wait, the harder it is to successfully transition their business.
Many probably even find it hard to temporarily put aside the daily concerns of running a business to step back and do some long-range planning—the kind that would ensure an orderly transition after their retirement. But it’s well worth it to do so. Essential, even.
Succession Planning 101
You don’t have to become a statistic. After all, there are a range of time-tested strategies for executing a successful succession plan, a managed transition to the future. Done correctly, such a plan can preserve family wealth, create the conditions for continued company growth, and set the stage for your eventual retirement.
Identifying a Successor
The first step is figuring out who will run the company after you’ve stepped back from management responsibilities (though you may opt to retain some ownership in the business). You’ll have to decide whether there is a family member or internal candidate, or if you’ll have to look outside your company for a future owner/leader.
If you decide to look outside your own four walls for future leadership, business advisors and search firms can be good resources. Lawyers and accountants are consistent sounding boards and have a breadth of contacts to support a search for the right buyer. However, unless they can structure a fee for the search, you could be paying by the hour.
Alternatively, an executive search firm that focuses on senior-level placements (like ours) can identify quality professionals that you probably couldn’t find on your own, even if you could invest the time to do so. They know the qualities to look for and they can vet candidates to ensure their proper qualifications.
Perhaps most importantly, a reliable firm has the experience to identify a candidate to fit your particular corporate culture. And finally, a seasoned search firm would be able to help craft a compensation plan that would properly incentivize a leader over the long term.
Grooming a Successor
Once you’ve identified the individual, or in some cases, individuals, you’ll have to create a plan to properly train, mentor, and groom them for the role. Ideally, allow 18-24 months to optimize this transition, and more if the person has never served in a president/CEO role.
Talent management and leadership development are essential in every organization. However, when a person will be called on to take the reins for a new generation of leadership, it is important to have the necessary support. Here too, a good relationship with a reputable search firm can help. Such firms can help coach best practices in the talent and leadership development area.
If good leaders are developed, a solid leadership development process raises the likelihood of success. The consulting firm Deloitte suggests a four-pronged approach:
- Build experience with “stretch” assignments and strategic job moves that give high-potential leaders a chance to learn new strengths.
- Give people exposure by focused efforts at mentoring and executive sponsorship that tie personal assessment data to clear, specific objectives.
- Align performance expectations with compensation and job mobility so natural incentives help drive people in their professional development.
- Embrace executive education approaches that teach leaders how to think differently, instead of relying on traditional models that reinforce conformity.
That’s a sensible approach for developing leadership in a general sense. And your succession planning should really not be a separate process, but rather integrated with your larger talent-development system.
Working Through the Financial Details
Do you know what the business is worth? Obtaining a third-party valuation can be costly, however understanding the value of the business objectively is necessary for planning. Eventually, you’ll have to set up a strategy for reducing your tax exposure (i.e., gifting, family trusts). The valuation specialist can properly price your company and possibly execute a buy-sell agreement that formally spells out the scenario for transfer of the assets. If you’ll be funding your retirement from the proceeds of the sale, you’ll want to visualize the appropriate cash-flow scenarios.
You may want to consider alternate corporate structures that would better enable the transfer of ownership under more tax-beneficial terms. Your current sole proprietorship or limited liability corporation might just work better as an S corporation, for instance. You’ll need the proper technical advice on this as it gets complicated quickly.
Best Laid Plans
The intention of bringing on new ownership is not always good. Some owners see it as a necessary evil and don’t want to see others succeed where they have dominated. Many hold their cards too close to the vest, so to speak. This is a setup for failure.
Setting the new leader up for success is a necessary component of being able to cash out. It can include providing a history of relationships with vendors, advisors, and customers where the owner has benefited or been burned.
Additionally, the owner often has the loyalty of employees. This requires that internal buy-in for the transition must come from the top. The owner will need to practice what is preached, with enthusiasm and conviction.
As complicated as the issues of privately held businesses are, the potential complications are multiplied by family ownership. Family-owned businesses account for about half of America’s gross domestic product. And while they typically summon images of small mom & pop operations, that’s not the whole story. About one-third of the Fortune 500 consists of family-owned businesses.
But that’s not to suggest that it’s easy to transition a family business to the next generation. In fact, only 30 percent survive into a second generation, and one in ten make it to a third.
If those who have studied family business success are in agreement on any one point, it is this: you have to get buy-in from the entire family on a path forward to the next generation, possibly with help from a professional. Otherwise, you run the risk of opening or re-opening deep emotional fissures that could easily sink the company.
Family-owned businesses face all the usual challenges of every business—finicky customers, fluctuating demand, rising prices, etc. Additionally, they potentially deal with the various decades-old psychodramas of competing siblings and power challenges between parents and their offspring. So it’s doubly tricky to build a bridge to the next generation of ownership and management.
If you haven’t done so already, start the discussions. Explore the options that will best serve your retirement and the future of your company. Ask your trusted advisors for their take. Talk with family about goals and expectations.
The reason most people found companies to begin with is to build organizations that will endure. Prudent succession planning, executed well in advance, helps ensure that the company you or your relative or friend started will not just survive, but flourish into the future. t
- Posted by Cassandra Greaves
- On January 31, 2019
- 0 Comments