Company Succession Planning - The Early Days
First, be realistic. There will be hard truths to face. There will be more work and frustration than you think. This article is not comprehensive and your circumstances will drive the process. Make a start now and calmly work through it.
Truthfully describe your company, its assets, what it does well, what can be improved and why you are in the game. Would you buy into this?
Take an objective look at your business. Is it at optimal efficiency and profitability? Can an outsider walk in and carry out due diligence without any surprises? Will you need to help with the ownership transition, and to what extent? Are there any skeletons in the closet? Who are your critical employees?
Are you better off selling the company or its individual assets?
Look at yourself and write your own job description. This job is what your successor(s) will do. Write down what is unique to you – sales, technical skills, business network, supplier relationships. These are the things that must be transferred to a successor. They must be transferred intact or the value of goodwill will diminish.
There may be an obvious successor. Generally this is a family member, an employee, an investor or a competitor. If not, then you are looking at a sale of the business to an independent buyer.
You Need Advice
Whoever you see as a buyer, you will need advice with the value of your business and your tax situation. If your company is not performing well you may need the help of a specialist to maximize its value. Are your usual accountant and lawyer competent to handle your needs regarding succession?
Interested Third Parties
It may be your company but there are other stakeholders. These include employees, bankers, private investors, debt holders, primary customers and main suppliers. Each stakeholder has different needs. Communication with each must be carefully thought out and timed. How open can you be, particularly early in the game? You may need advice on how to handle stakeholders, particularly the employees.
This can be an obvious choice and a great reward for those who have been with you through the market’s ups and downs. A few thoughts:
- Which employees – do they have the financial capacity to buy?
- Are they willing and competent? Do they need skills upgrading or mentoring to transition, or are they too new a hire?
- How will you phase out – will you stay on as an investor and/or Board member?
- What vehicle will you use? This has to do with timing and transition. Think about shares, options, voting control in early days, making employees believe they genuinely own the business, and control.
- Be prepared for those things that may cause unpleasantness during due diligence – they must be minimized.
- In transition you must realize “I do not own anymore”. Can you think of yourself as a consultant providing the service of transferring the value you have been paid for?
Many businesses fail on this type of succession. The most common reason is failure on the part of the parent(s) to recognize the shortcomings of their children. This is the time for a solid reality check. If you suspect the transition will be long, then your children are not ready and may never be. Thoughts:
- Usually sons or daughters, but do not exclude extended family.
- If you are certain of their competency, then what extra skills, mentorship, etc. will be needed for them to succeed?
- Will they command the employees’ respect? If you expect employees to be mentors, how will those employees be rewarded?
- What vehicle will you use? Tax advice from a specialist is essential here.
These can be either an open market sale – usually through a broker – or an arranged sale. Arranged sales are generally made to a competitor or an entity with which you conduct business. If you have private equity investors perhaps they may be interested in taking control. Thoughts:
- Who is your best buyer? Can you get a premium price from a buyer who will gain an advantage from the purchase of your specific business?
- What is the best method of selling your type of business in the open market?
- Can you accommodate external due diligence?
- Are there areas that diminish value that you need to resolve? Old receivables are a common problem.
- Are you willing to put time into transition? Even with strangers?
Still calm? You should be. You now have a framework from which to begin succession planning.