Kerri, Author at This Way Out Group - Page 17 of 25

Family Business Succession Planning

Succession planning is a combination of contingency planning, management planning, hiring, transitioning out of an operational role, taking on a more strategic role, and looking ahead to your reinvention beyond the business.

In family businesses, succession planning may include determining ownership and management succession on independent parallel tracks.

Your exit plan should include the time and effort to implement succession planning to ensure the company survives your departure. Your exit plan will likely be a critical part of your own financial and estate plans.

Five Issues Of Family Business Succession

A succession plan is an exit plan. Your succession planning process should begin as early as possible just like any other exit plan: ideally, when you buy or start the business.

The best business sale outcomes are never a fluke. That’s even more true when your exit plan entails succession planning within the family. Five issues underscore effective family business succession. These issues apply to any size business regardless of industry:

Family business succession can be a painless process.

Family business succession can be a complex process. The combination of personal and business interests, emotional and financial, are leading causes of conflict in family businesses and as a result, many families never address or resolve these issues ever.

Here are some issues to be aware of when considering your own family business succession:

1. Are your children or other members of your family the right people to take over the business? When it comes to family, it can very helpful to have a pre-defined rubric of objective criteria as well as engaging independent external experts to facilitate this process. Ask yourself the following questions as objectively as you can:

  • Do any of your children have the necessary skills, education and experience to take over running the business? If not, are they willing and capable of learning these skills? Outside training as well as mentoring may be required. Do they share your goals, values and aspirations for the business? Do not assume or minimize these cultural issues within the family or within the business.
  • Do any of your children actually want to take over the business? They may have very different ideas or even different ideas for the business. Open and honest discussions about these issues with family members can be extremely difficult and awkward for all concerned.

2. Communicate openly and honestly about your hopes and dreams for the business going forward. Ensure that you are not imposing your own goals and aspirations onto your children. And, when you do transition ownership/ management/ control to the business to family members, do so in a way that is fair and transparent. Otherwise, you risk alienating family members who do not participate.”

3. Ensure that you have the appropriate business agreements in place, which are fair and contracted on commercial terms. One of your children may express a desire to take over the business while another wants to pursue their own professional goals.

Later, jealousies or rivalries may arise if the business does well and the child who didn’t participate in the business feels unjustly treated. A proper agreement in place will protect everyone from any future potential claims that may be made against you and your estate.

Given the current high divorce rate, it may also be wise to consider an agreement to protect against claims made by your children’s spouses against family business assets if their marriages break down.

4. Keep in mind that you do not necessarily need to pass your business on to your children in order to set them up to financially benefit from the business. This is an obvious statement, but one that is easy to overlook when your own identity, self-worth and sense of purpose and value have become fundamentally intertwined in your business. There are many options to ensure that future generations benefit financially that don’t necessarily involve them shouldering the mantel of owning/running your business. This is particularly true if the children are not ready, interested or have the aptitude and commitment to take on running the business. They may have other plans and aspirations.

By passing the business on to your children, you could be putting their entire financial future at risk in that situation. In contrast, if you were to sell the business and set your children up with financial structures funded by the sale proceeds, you would mitigate their risk, and they would have the flexibility to pursue other plans or aspirations.

Effective Management Succession Planning Starts Here

Mortality is not my favorite subject either. But leaving a legacy in your business is a way to ensure immortality not possible anywhere else. An effective succession plan establishes the ground rules for what will happen when you are no longer around or no longer capable of managing the company’s affairs.

  • To add value and make the business buyer attractive, consider appointing objective outsiders as members to your company’s Board of Directors independent of ownership.
  • Establish regular strategic planning meetings that include successors and key employees whom you need to stay fully engaged in the company.
  • Select and regularly communicate with a team of outside advisors, including lawyers, accountants, consultants, wealth advisors and tax advisors who have experience with privately held businesses, complex corporate matters and estate planning. These advisors can be a source of insight, continuity and strength as you prepare the business for succession or during an unexpected crisis.
  • Be very honest with yourself when evaluating the strengths and weaknesses of candidates you consider as possible successors – internal or external. Try to separate issues of family, loyalty, longevity from issues of business acumen and strategic management.
  • Start early to be prepared for the unexpected. Most closely held businesses experience a “sudden loss” of leadership due to death or disability because the owner never planned or prepared for their transition to reinvention; thus leaving behind children or spouses ill prepared to continue to manage the business effectively or sell it most profitably. What would be your plan for the “following Monday morning?” Who would run the company?
  • Invest the time and money to train and educate the “next generation” of leadership for the company- whether the successor is your spouse, children or another family member or outside management hired in. If your succession plan calls for a full or partial sale of your business to some or all of your staff, do the same for the employees who will take over.
Succession Problems Impact Buyers Sellers And The Transaction Experts In The Middle

As the baby-boomer generation ages, a multitude of succession problems are becoming evident. Each one compounds the effect of the others. Here are just a few that pertain to the small-medium size business market that you should take note of now:

  • In both the US and in China the children of baby-boomers are much less likely to take on the family business.
  • According to family business expert Frank Schneider, statistics reveal that only a third of family businesses are successfully transferred to the next generation.
  • Recent research out of the Family Firm Institute and Babson University for Entrepreneurship report that the 70% of family businesses do not survive to the third generation.
  • A survey by PricewaterhouseCoopers finds that one out of every two company owners plan to sell their business within the next 10 years.
  • Many baby boomers have decided to step back and re-evaluate their lifestyles. A typical seller today is more likely to be in their 40s or 50s rather than their 60s or 70s, as was the case 10 to 15 years ago.
  • People 55 or older own 30 percent of all businesses with employees.
  • Businesses with employees are expected to grow in number by 22 percent every five years

According to David Fields, president of San Diego-based IBG Capital Markets:

“The intersection of private equity money and baby-boomer demographics means that [we] can conservatively assume a threefold increase in transaction activity for companies with employees as boomers move into retirement.”

As much as the statistics paint a picture of abundant opportunity for buyers and transaction experts, it’s not the same for sellers. One report out of British Columbia, Canada states that only 10% of all deals actually get done. The rest languish because the seller is not prepared or the sellers wait until it’s too late.

JOHN ZAYAC president and founder of IBG Business Service, Inc. in Denver, CO gives great advice when he states:

“The best advice I could ever give to the owner of a middle-market company is this: Plan for the sale of your business from the day you start it. Most business owners exit their business with less than six months of advanced planning, consequently receiving a mere 50 percent to 70 percent of the business’ potential value.

Appropriate planning, well in advance of a transaction, will allow a business owner to maximize company performance.”

The downside for sellers is that there is a window of opportunity before the supply of businesses exceeds demand. The vastly increased supply of small-and medium-sized businesses available because of baby-boomer retirement/reinvention will drive down valuations and give new leverage to buyers instead.

There are supply-demand implications of millions of businesses coming onto the market in a concentrated period of time. Owners are not factoring these implications into their exit planning in terms of timing, valuations, opportunity or successors.

Identifying Your Successor

Identifying Your Successor is about Securing Business Continuity.

Many if not most business owners avoid, postpone and in the end fail to plan for their business continuity in the event they can no longer work due to death or illness.

  • They all have the naïve theory that they’re too young to worry about succession or retiring or their exit strategy.
  • They all assume nothing will ever happen to them. If they don’t think about the ‘what if’s’ – they can’t happen…
  • They don’t bother to create a business succession plan to address an unanticipated event such as disability or death – which can occur any time.

Ideally, every business owner should start planning their succession, working themselves out of a job from the outset, even in their business plan. It’s never too late to start today.

With an eye for hiring, grooming and cultivating successors in various aspects of the business, the strengths of the founder can be instilled wide and deep throughout the organization.

For small and medium size business owners, the business is a primary asset they will need to liquidate to fund their retirement.

If you intend to sell the business to a third party – becoming detached from the day-to-day operations is a straightforward strategic process to maximize the financial gain. But if you wish or intend to keep the business in the family, your choices for successors can shift or be constrained by family requirements, needs and politics.

Succession planning is the responsibility of the owner, not the management team or the next generation. Develop the succession plan in sync with the owner’s transition plan to balance the best interests of the company with all its employees, vendors and clients; and the requirements of the exiting owner who needs capital to fund the rewarding lifestyle he deserves as the fruit of his labors.

Succession planning is only one piece you need in place for a strong integrated business plan including operations planning, transition planning and contingency planning.

Don’t Ignore Succession Planning

Along the lines of ‘begin with the end in mind‘, start this new year with an eye towards identifying who will be your successor and how you will implement your succession plan – even if you anticipate it will be decades into the future.

Here’s a personal story to make my point:

At age 34, my father launched his business with two partners in 1960. The business grew to 5 locations, received many accolades, awards, interviews, etc. In 1982 my father was diagnosed with cancer. By 1984, he was too jaundiced to appear at the office or be seen by clients. That’s when he invoked the buy-out clause in their partnership agreement. He had that exit strategy established from the day they opened their doors 25 years prior when he was young and healthy.

He knew his partners would be his successors if anything unforeseen should happen and vice versa. They had structured their agreement that way from the outset. He never dreamed he would be the one to have to invoke that paragraph of their business plan. But when he needed it, he could and did. They bought him out and the business continued without a hiccup. And my father was able to secure my mother’s financial future quickly and easily.

Many if not most business owners avoid, postpone and in the end fail to plan for their business continuity in the event they can no longer work due to death or illness.

  • They subscribe to the naïve theory that they’re too young to worry about succession or retiring or their exit strategy – even after age 65!
  • They assume nothing will ever happen to them, they’re too healthy, to vital and too important to the business. The logic they use is: “If I don’t think about the ‘what if’s’ – they can’t happen…”
  • They don’t bother to create a business succession plan to address an unanticipated event such as disability or death – which can occur any time.

Ideally, every business owner should start planning their succession, and work himself or herself out of a job from the outset, even in the business plan.
It’s never too late to start today.

With an eye for hiring, grooming and cultivating successors in various aspects of the business, you have time to instill your strengths and values wide and deep throughout the organization.

For CEOs of small and medium size businesses, the business is a primary asset they will need to liquidate to fund their retirement and provide for the financial future of their families.

If you intend to sell your business to a third party, then becoming detached from the day-to-day operations is a straightforward strategic process you need to put in motion.

As the seller, in order to maximize the value you can realize from the business and produce a financial gain, you must shift the value of the business from you personally, to the business itself. The sooner you start focusing on this long-term objective, the better the outcome for both you and the business.

Alternatively, if you wish or intend to keep the business in the family, your choices for successors can shift or be constrained by family requirements, needs and politics.

Succession planning is the responsibility of you the owner, not your management team or the next generation. You must develop your succession plan in sync with your own transition plan to balance the best interests of the company with all its employees, vendors and clients; and the requirements of you the exiting owner who needs capital to fund the rewarding lifestyle you deserve as the fruit of your labors.

Succession planning is only one piece you need in place for a strong integrated strategic plan including operations planning, transition planning and contingency planning.

Think Strategically – Your Vision and Exit Plan Must Agree

When was the last time you revisited your vision for the business. It’s essential to think strategically.

Your vision and exit plan must agree. Strategic planning is a process, not a static step you take and you’re done.

You can apply strategic thinking to every part of your life, your business or any other endeavor. Strategic thinking is the key to achieving every goal you set because it helps you reassess and stay focused on the present opportunities leading to your long-term goal(s).

Wide Angle Lens

You need a wide-angle lens to see the whole picture, to see the big picture, to see the end game for your business.

You have a vision for your business. That’s a fact. Maybe you wrote it down and maybe you did share it with your team when they came onboard. But do you review it with them regularly? Do they know how their work and their efforts help to deliver the desired outcome (financial, customer relations, growth, product development, etc)? This attention to your vision is essential to ensure your efforts are always leading towards your desired exit plan.

A Strategic Approach to Vision

Developing a strong vision statement takes time. It can’t be expressed, refined, tested and reviewed on a 24-hour deadline. You need to test that vision statement in those exact words in the marketplace, with vendors and most importantly with your team.

It would be funny if it were not so damaging to businesses, to survey the executive team of almost any company – and ask them to explain the vision statement from their viewpoint and their tasks and responsibilities to the company. Most of the time, the different department heads, never mind their teams, have a culture of fiefdoms within the business and don’t communicate well outside their own domain. As a result you end up with lots of silos, isolating teams, instead of collaborating more in the best interests of the company.

What Drives Your Vision?

Do you know what drives your vision? Drivers give power to your vision. They are tangible and measurable elements as well as the core values you want embodied in the business, in each member of your team and in the customer experience – think LL Bean.

Only when you are absolutely clear on the vision for your business, can you declare the mission for your business. Without the strategic viewpoint of the vision, there is no foundation to sustain the mission.

Structure and Your Exit Plan

When you implement a structure and build the resources to take on all the key roles in your business (human resources, assets, organizational structure, etc); they must be aligned with your exit plan. You are building a business to be in a position to exit that business on your terms.

You must envision how the business will be managed (by you or others), the support team you need in place (adding tangible value to the business), and the structure and systems that must be in place to make you superfluous to day-to-day operations.

This becomes your goal, to ensure every detail has been assigned to someone else and you can maintain or possibly grow revenues even as you remove yourself from day-to-day activities and decision-making.

A vision and a vision statement are essential to any strong business. But even more important is how you deliver on that vision with an exit plan that lays out how to achieve the vision. However, all this planning is for naught if you don’t act. Implementation is essential. Nothing else substitutes for implementation. Therefore, the vision statement and the exit plan becomes the bookends of implementation. They must agree strategically.

Plan Your Exit Strategy By Design Rather Than By Default

Everyone starts their business confident in what they set out to do, with a dream of what the business will provide for them. We all get very busy working in the business and it’s natural to not worry about the future never mind when and how you will exit the business.

But if you are serious about profitably exiting from the business at some point in the future, here are 5 steps to ensure you achieve your goal to fulfill the promise of what your business would deliver for you and your family.

  1. Identify your exit strategy goal. –
    Do you want to build the business to a certain level and sell it?
    Do you want to pull a certain income out of the business until you die?
    Do you want to pass the business on to your successor or a family member, or some other specified designee?
  2. What does the business have to do/provide/deliver – to allow you to achieve that goal?
    It varies depending on what you want. Even if what you want is a moving target, document it anyway. You don’t know but that an exit opportunity out of left-field could help you achieve your goal easier, better or quicker than what you planned for. Keep your exit strategy front of mind.
  3. What are the steps and milestones for that goal?–
    With the first 2 pieces in place, now you can start breaking down the steps it will take, and all the pieces you have to pull together. Some pieces like clean financial records and documenting all procedures can take years – well before you are in a position to act on your exit strategy. In this case, your goal achievement hinges on staying focused on the tasks that lead to realizing your ideal exit strategy.
  4. Which exit strategy option appeals to you and which one will best fit your goal?
    Based on your goal of when to exit, how to exit, and what happens to the business when you do exit, etc.; the most effective exit strategies become obvious to achieve your goal. Others clearly don’t fit your needs or goals; and maybe others, you have no interest in pursuing. Only with a clear plan by intention starting now, can you ensure you’ll achieve your exit strategy goal.
  5. What steps can you take every quarter and every year to set up your business for that exit strategy?
    Now we get to implementation. For exit strategy goal achievement, the longer the timeframe you have to implement the business foundation pieces, the more cohesive they will be and the more functional they will be independent of you. This is one more way to maximize the value of the business in the marketplace, making it a more attractive opportunity for buyers. Especially if part of your goal, by design, is to command the best price, then goal achievement requires working on your exit strategy every quarter of every year.

Apply these 5 steps to design your exit strategy by intention rather than by default if a profitable exit will be one of your goal achievements. It’s what you must do to optimize your business and help your broker, consultant, lawyers and other exit professionals to help you achieve your goal of your ideal exit strategy. Anything less and your exit will be by default, at minimum value, at the greatest cost to you, with the fewest choices and less leverage to achieve your goals.

Business Exit Planning Is Easier Than The US Military Exiting Iraq But More Complex Than Selling A House

It’s true. Business Exit Planning Is Easier Than The US Military Exiting Iraq — But More Complex Than Selling A House.

The majority of business owners avoid, procrastinate, deny, and postpone any discussion of business exit planning. The statistics consistently report  95% of all CEOs find excuses to not plan their exit.

The anticipated fear and overwhelm are exaggerated. When you put it in perspective, exiting your business is far easier and produces many more reasons for you to celebrate, than the recent US military exit from Iraq.

No CEO Can Do It Alone.

Just like it took large teams of experts  and years to plan and implement the US military exit from Iraq; you need to surround yourself with a team of experts who know more than you do about exit strategies and achieving your exit objectives.

I concede that your business exit is not as straightforward as selling your house or buying investment property. But, with a little help from your exit strategist and your transaction experts, you can focus on what you do best in the business while your team streamlines the process of exiting your business on your terms and on your time line.

No Planning

The absence of planning is one of the deadliest oversights a CEO can succumb to. CEOs know better. They just don’t invest the time and effort to plan their exit. The default option is that you will exit your business feet first or worse, – close up shop with nothing to show for all your time, effort, expertise and resources invested. Too many CEOs resign themselves to never monetize their business, never fulfill their dreams or live their legacy.

Business exit planning is easier and much more inexpensive than the US military exit from Iraq. In fact, exit planning actually will make you money, make the business stronger and more valuable, and provide a plan for your next steps, your reinvention after you exit.

Building Wealth and Exiting Your Business Don’t Start on the Finish Line

Don’t start on the finish line. There are five arts to master to build wealth and exit your business. That takes time.

Strategic Planning – The Art of Direction and Decisions

Building wealth and exiting your business don’t start when you are closing in on the finish line. It’s proven that when you focus on selling your business two to five years before initiating the sales process, you will almost certainly realize a much larger return. Developing a systematic approach to growth with a focus on your long-term goals makes every decision along the way easier, even in the face of risk, incomplete information, or unexpected change.

Continuity/Succession Planning – The Art of the Changeover

A systematic approach to succession planning gives you control, choices and sufficient time to choose, train and transition management, of your business. Your job here is to maximize the value you receive when you sell or transfer your businesses. You need to identify an owner-centered approach to exit planning based on your goals, objectives and concerns.

Exit Planning – The Art of Monetizing Your Business

Exit planning for wealth is all about maximizing and preserving the transferable value of your business. It’s extremely important to integrate personal, financial and estate planning goals; and then coordinate them with the growth goals and opportunities of your business; to maximize profit and minimize tax liability on both sides. Your fiduciary objective is to transfer ownership and corporate value as profitably as possible.

Contingency Planning – The Art of Structuring Your Business For Opportunities, Possibilities And Growth

CEOs in general never take time to develop contingency plans. They are building a prosperous business not planning for a crisis or its demise. Skipping this one element of their business minimizes the value they can expect a buyer to pay for the business. You must develop those contingency plans and build the foundation elements to maximize valuation and make the business buyer ready.

Transition Planning – The Art of Reinvention

When you stop and think about it, most entrepreneurs do not measure success in terms of the financial rewards, but rather by the freedom and potential legacy that these financial rewards confer. But entrepreneurs often postpone transition planning because they struggle with how they would use their new freedom and how they want to define their legacy. You need to learn to find new purpose, community, and structure for your time; and then how to master wealth management and its new challenges and responsibilities.

Foundations for Growth and Value

The foundation for growth and value for your business starts with planning.

Plan

The average business owner spends 80 hours
preparing a business plan and
only 6 hours preparing for their exit”
ROCG 2007 Survey of Business Owners

Read that statistic again:

“The average business owner spends 80 hours preparing a business plan and only 6 hours preparing for their exit”!

That lack of preparation and planning is the reason why owners are ill-prepared to achieve an ideal exit from their business. Instead, they settle for only 50-70% of the value of their business when they sell.

It’s up to you to maximize the value you can receive at exit. It’s up to you, the owner, to demonstrate future value for the buyer, including growth projections to justify the selling price you want to receive on your terms.

You can delay and minimize your efforts and go for a sale that leaves 30-50% of the value of your business on the table or you can plan and strategize over time to prepare you, the business, and your team for the best possible outcome.

Exit planning starts with two exercises, one for you as the CEO, and a parallel exercise for the business. In this exercise you will list your personal core values, your vision and your mission.

Repeat the exercise, with or without your management team, and list your company’s core values, vision and mission.

With values, vision and mission in mind, you can start planning for your exit and what that will mean for the business as well.

By planning ahead, you can be more strategic with each hire, each goal, each decision you make between now and your target exit.

When you have a clear plan for your exit, you will make better decisions, easier, faster, with less risk, fewer mistakes and hit fewer deadends in every area of your business.

With an exit plan integrated into you business plan, corporate goals and strategy will be tied to your end goal, your personal end game.

The first step in exiting on your terms and your timeline is planning. Here are a few areas where you can start planning at absolutely no cost. Planning covers a wide range of issues, decisions and changes. Planning doesn’t have to be expensive. But it takes concentrated time, effort, commitment and follow-through to see results.

Here’s where you can get started now.

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