Getting Your House in Order: Driving value through succession planning
The following is an excerpt from Ice Miller's Business Transition Strategies to Preserve Wealth Guide
, which provides insights on a variety of topics to help ensure a smooth business transition.
By now you’ve heard countless times the importance of succession planning to a smooth transition of business ownership. Yet for reasons that are understandable, if not excusable, few businesses have succession plans and fewer still useful ones. Business owners are drawn to the most important issues on any given day, and often can’t find the time to focus beyond the next fiscal planning period. In the abstract, succession planning seems like an unpleasant and overwhelming process that has no bearing on the company’s current success. However, a thoughtfully crafted succession plan can actually help a business run better in the near term, drive value upward for an eventual sale, if so desired, and provide an avenue to reduce personal and professional stress. Planning for a transition can drive value and efficiency today because a good succession plan will incorporate many of the attributes of preparing for an outright sale. After all, owners want to transition as healthy and valuable a company as possible, whether to the next generation or to a third-party.
A solid succession plan will have clear objectives, identify key people and mark the path to transition of management and ownership upon a variety of triggering events. However, many plans fail to consider the value and stability of the business itself throughout this process. The key stakeholders in succession planning, or a subset of those individuals, are generally the same people best positioned to enhance the value of the business itself while developing and implementing a succession. By making value enhancement one of the objectives of the succession planning process, owners and other stakeholders can reap short-term and long-term benefits in the form of increased profitability, higher valuation and reduced stress.
The most important step to succession planning is getting started. The simplest and most effective way to do this is to delegate the very first tasks to one or two key personnel, board members or advisors. Let them get the process started with accountability for moving the process forward. One of the first tasks would be to put together the entire succession planning team, which may involve not only owners and key executives, but also one or more board members or advisory board members, an accountant, an attorney and perhaps even family stakeholder representatives. Like any good team, not everyone is involved in every aspect or decision regarding the plan, but each member will have some responsibility. Once the team is in place and everyone has bought into the process, different people or groups will be tasked with specific responsibilities. One of those should be overseeing a critical review of the business and identifying opportunities for improvement.
Often succession plans address all the individual stakeholders, but ignore the business itself. When deciding what a succession plan will accomplish, whether it’s a transfer to another generation, sale to a strategic buyer or an Employee Stock Ownership Plan (ESOP) transaction, it’s important to first consider what it is that will be transferred and its financial and intrinsic value. By taking a critical look at all aspects of the business, designing steps to correct any shortfalls and taking advantage of any opportunities, current and future business value is enhanced. This process will ensure that the business itself is in optimum condition both currently and when the time for transition eventually arrives. Taking these steps can prove incredibly valuable if transition is unexpected, as in the case of the sudden death or disability of the current owner-operator.
Once the decision to design a succession plan has been made and the senior leadership has committed to the process, it helps to have the team take a step back and critically assess the business itself. When you first start to think about succession, it helps to think like a buyer, even if the most likely scenario is that the next generation will take over the enterprise. Why? Because it forces leadership to focus on the areas that are important to the business and to identify areas for improvement. Potential buyers look for indications of a healthy, successful businesses including quality of earnings, performance in line with projections, good customer and supplier relationships, diversity of customers, competitive advantages, a well-designed strategy and action consistent with it, strong management and any technological or intellectual property advantages, amongst other details. When deciding on the path of a succession plan, each of these areas should likewise be examined in detail and addressed if necessary.
To learn more, download the Business Transition Strategies to Preserve Wealth Guide
or contact Tom Pampush