Succession planning is an entrepreneurial pitfall. Let’s take a look at some strategies for successfully exiting your business.
Ask an entrepreneur how much time he or she devotes to succession planning and once the look of incredulity passes you’ll get one of these responses: “I’m too busy trying to make a go of the business to think about succession.” Or, “I’m only 35 years old. I’m healthy. I’ve got another ten years left in me before contemplating succession planning.”
Doug Robbins, founder of Robbinex Consulting Intermediaries, an international firm that specializes in helping owners of mid-sized companies with business transitions, describes this as the five-year syndrome: “Call me in five years. You call in five years and they ask you to call back in another five years.”
According to Robbins, who is based in Hamilton, Ont., from a legal perspective there are about 20 disciplines of law that need to be accessed when considering succession. And, it’s unlikely that one lawyer has enough expertise in all these areas.
Add to the legal questions hundreds of other inquiries that need to be addressed for transitioning out of a business and it’s overwhelming. Do you sell? Leave a legacy? Give back to the community? Turn it over to the employees, merge it with a competitor or just close it down because the assets are worth more than the business is worth?
Avoiding succession planning is an entrepreneurial sand trap. Robbins makes it clear that when entrepreneurs make a business plan to open a business they need to make an exit plan, too. Here’s the storyline.
The entrepreneur mortgages the family home and has his spouse sign the bank guarantee. Three months later a bus hits the entrepreneur. The bus keeps going. The entrepreneur doesn’t get up. The bottom line is that illness and unfortunate circumstances are unexpected.
It is hard to let go
Heidy Lawrance, owner of WeMakeBooks.ca, a division of Heidy Lawrance Associates, a Toronto-based, independent production house for self-published authors such as David Chilton (The Wealthy Barber) laments, “I was absolutely ignorant and naïve. I should have thought of succession planning but I was going to get a job any day. Freelancing was only temporary.” Twenty-eight years later and Lawrance isn’t sure who will succeed her and manage her business. As for selling your business Lawrance states, “It’s hard to relinquish a business that carries your name.”
David Friesen, past CEO and Chair of Friesens, in Altona, Manitoba, says, “It never crosses your mind that a time will come when you realize that you can’t or you don’t want to do this forever. And, of course the easiest option is to leave it in the family and assume that someone else is going to run it while you take it easy.”
Friesen admits that he could not have made the same succession decision his father and uncles made. D.W. Friesen & Sons Ltd. was a family business until the early 80s. When the reality struck that not all Friesens were passionate about the print business, the brothers turned the company into a trust and sold shares. Now others are running Friesens as employee-owners and hiring professional managers. David Friesen was the last family member in the business. His two sons didn’t follow him into the print business.
David Friesen makes it crystal clear that Friesens’ succession plan is unique. “They didn’t try to open up manufacturing operations in different provinces or different countries. They just made this model work in Altona.”
There is no one size fits all solution
Many owners believe in leaving a legacy and hope that their children will take over the company. Robbins points out that intergenerational business transfers are high stake. Sharing a bloodline doesn’t necessarily mean that sons and daughters are the best leaders for the company.
When it comes to handing the business over to a son or daughter, Friesen cautions that the more successful a company is the more difficult it can be for the children. Watching one’s parents grow a successful business doesn’t prepare the next generation for the difficulties of running a business in tough economic times when margins are slim and the competition is fierce.
Selling to employees – a management buyout – can be fraught with problems. Lending institutions may see employees as high risk, and offer only unattractive rates and unbearable loan terms. Moreover, line workers may not have the leadership expertise to run the business efficiently and effectively. And if a management buyout falls apart, disgruntled employees may leave the firm, reducing the attractiveness of the business to other buyers. Lawrance says that many employees have no appetite for the marketing, managing and bookkeeping aspects of running a successful business.
Selling the business outright may be the best option. But, before an owner can contemplate selling, she needs to determine what the company is worth. An objective market assessment and valuation of the business should determine if this is the optimal time to divest. Is the company legally ready or is this the time to hunker down, consolidate and enhance the business in order to reap a higher price at a later time? A market valuation assesses the operation from an impartial buyer’s perspective
Some sole proprietors and partnerships start succession planning by stating outright that no relatives are allowed to work in the business. Just making that decision is the first step to a successful business transition and a peaceful family life.
There is not a “one size fits all” approach to succession planning—what works in one organization may not work in another, given different contexts, cultures and resources. Moreover, an approach may evolve over time as an organization learns what works and what needs to be improved.
The Government of Canada Succession Planning and Management Guide and Robbinex Intermediaries (robbinex.com/) are good places to start for understanding succession planning. Both websites are well organized, informative and link you to other credible resources.
The government site goes through the steps of developing pools of talent to fill key positions that are critical to your business. It outlines how to develop a succession plan, including how to fill your business with skilled and competent employees.
A plus for the Robbinex site are sixteen authentic case studies of troublesome inter-family business transitions. There’s also a tab which provides fourteen alternatives to selling your business.
Follow these steps and make a plan
Doug Robbins of Robbinex, has this advice to kickstart your succession planning
Be prepared for constant change and dealing with the unknown.
Plan for what you are going to be doing in five years and ten years.
Plan for where your business needs to be in five and ten years.
Develop broad goals and SMART (specific, measurable, attainable, realistic, time-sensitive) objectives to attain these plans. Include operational, financial and personal goals.
Break your plan into quarters and diligently monitor progress every quarter.
Are you on track? Are revenues and expenses in line? Are your personally where you wanted to be? Where are the variances? Adjust as required.
Successful succession planning is about managing change now for the future. It’s realizing that the attitude of a twenty-two year old entrepreneur is different from one that is thirty-five years old, in a relationship and with children.
If you missed succession planning when you opened your business, now is the time to begin. If you don’t plan, someone or some event will do the planning for you.