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Succession Planning: Plan Ahead, Stay Ahead

Jan. 1, 2006
The best business succession plan is to have a plan.

Succession planning should be a key component of a company's strategic business plan. It's the only way to guarantee the perpetuation of a company. Ed Reel, principal, Summit Acquisitions LLC, an Atlantabasedmergers and acquisitions firm, metaphorically describes succession planning as driving a car by looking through the windshield, not the rearview mirror.

A succession plan begins with, or should be part of, the company's strategic business plan. The starting point should be what the owner wants for his future and the future of his family. Too often owners begin with the wrong question: How do I avoid taxes?

There are three major ways for owners to handle the succession of the business they spent years of their lives building:

  • Pass it on to a family member;
  • Find a strategic partner and sell;
  • Build a cadre of capable, future leaders.

Each choice has its pros and cons.

"It's been our experience that most people don't think about business succession until they're at the point where they want to sell," says Debbie Douglas, a nationally known expert on mergers and acquisitions. Douglas authored Cashing In! Selling Your Company for Maximum Price [Word Association Publishers, 2002]. She is managing director of the Douglas Group, a St. Louis-based company that has facilitated many material handling company mergers and acquisitions.

She compares succession planning with buying long-term healthcare insurance when you're young. People usually don't. Neither do they think of getting out of a business at the beginning.

"We go through the whole process of determining what the business' value is," says Douglas, "and often find problems in the second-tier of the structure." What Douglas means is that the owner has taken on so much of the responsibility of running a company, that he or she fails to develop executives who can takeover.

"These are the guys who never take more than one week of vacation," she says with a laugh. "Then they end up staying with the company after the sale to minimize the buyer's risk."

Preparing the way means letting go
Educating and transitioning internal job functions to future leaders is not easy. It's time consuming and requires a great deal of trust. Another trust issue, the business owner often feels he holds the customer's trust better than others he might hand customers off to.

Douglas recommends getting people into the sales organization who can generate sales. "Let those second-tier people build relationships—and make mistakes," she says. "The owner has to loosen the reins and move customers to those secondary people."

And, of course, a plan is not a plan unless all the players are aware of what is happening. "The owner might say he's grooming the second tier of executives," says Reel, "however, if those other parties have not been brought into the process and agree to the plan, and know what their roles are to be, well, you don't really have a plan."

Too often succession plans are started, possibly written down, and then put on a shelf to gather dust while the business of business drives the executives. "The succession plan should be brought out every year," says Reel, "and reviewed as part of the annual strategic planning meetings." This approach accounts for changes within the company and industry being served.

Then there is the issue of technical skills. Douglas feels no owner of a descent size company should be spending time with the technical details. He can hire people to do that. "If an owner can't make his time more valuable than a technician's time, he's doing something wrong," she says.

When the business is defined by what the owner does, Douglas points out, the owner doesn't really own a business, he owns a job. A business is something the owner must be able to sell.

Succession and material handling
It's no secret, material handling is becoming more of a customerservice business every day. Successful material handling today is defined by how well information is handled. This does not necessarily bode ill for material handling companies, distributors in particular. Successful distributors have always been the companies able to bring a variety of products to its customers.

"Distributors are good at sourcing supply chains," says Douglas, "from vendors to customers, be they off-shore or on-shore companies. They can put things together, effectively. Good service providers are good customer relationship people. They don't have to be technically skilled, as long as they are smart enough to hire the right gun when they need to."

How does this fit with succession planning? Good customer service is becoming a more critical way of attracting the best buyer when it's time to make getting out of business the order of business.

When it's time to sell a business, it's best to get professional help. "Many sellers come to us with a list of companies they think would make the best buyer," says Douglas. "And usually they're wrong." The best buyers do not do what the seller does; they occupy adjacent markets to the seller's business and may want to add the seller's capabilities to their product mix.

Douglas recalls a company that made belts for conveyors. The owners came to her with a list of similar companies they felt were perfect suitors. Douglas went out and talked with companies that bought belt conveyors to see what else they bought; things adjacent to conveyor products. She then talked with suppliers of those other products to see if they would be interested in adding belts to their product line. The end result was a sale for about twice the price of what the seller had expected.

If the succession plan includes selling the business to a strategic partner, it works best when it's a long-term process, not an overnight decision. "Merger and acquisition companies can help an owner build the capabilities and brand or market share over a three to five year period," says Summit's Reel. "The business could do nothing; go along its current path, or it could become a more valuable business along the way."

Reel says even modest 3% organic growth could lead to a 25% or 30% higher value when it comes time to sell.

Reel suggests a three point program for succession planning: First, a succession plan must be viewed in strategic terms—the why and when of succession planning. Next comes the tactical plan—how will it be accomplished? "The third part, operational implementation," says Reel, "is the execution of the first two parts and if not done properly, even the best plan will fail."

In developing a succession plan, it's recommend that a matrix of possibilities be constructed. This matrix of ideas and options should be subject to an annual review to reflect changes in the company and in the industry. Business decisions should be made to determine which will drive the highest value for the company's owners.

"When you have all the possibilities in front of you," says Reel, "it's quite possible that the best choice will be a hybrid you had not thought of."

Promoting from within
Under the bright lights of objective examination, the idea of passing a business along to a son or daughter often pale. The challenge (from a strict business point of view) of choosing a son or daughter is that they only know how to do business one way; the way mom or dad did it. And no matter how well educated they might be, other employees will always view them as the boss's kid.

Often the family member taking over has the same vision and perspective as the parent and does not look beyond what is currently being done with the company. Company executives have to be accountable for expectations as outlined in the strategic succession plan, be they family members or hired managers.

"Even with family members taking over a business," says Reel, "there must be expectations they must meet to assure the growth of the company."

A successful succession plan, regardless of the approach, requires excellent communication among all parties, says Reel. "The secondary tier of executives need to understand that they are a part of the plan," he says, "and the people need to understand which skills they need to enhance if they are lacking." As the levels of responsibility and accountability increase for future company leaders, it's incumbent upon the owner to recognize and encourage improvement.

Succession planning is no more, nor less, than taking control of what will inevitably happen. Sooner or later every business owner leaves the business. A planned, orderly departure is better than any alternative.

5 Tips on Preparing to Sell Your Company

What should you do to prepare your company if you are contemplating selling in the future?

  1. Focus the business. A niche business that has a significant market share in a narrow segment is more attractive to a larger group of buyers.
  2. Concentrate on profits. The better the company is doing, the higher the multiples will be.
  3. Batten down the hatches. Get non-disclosures from key staff, have a good management team and start introducing them to customers to reduce owner dependency.
  4. Clean up the facility. Assess capital equipment. When owners are planning to sell, they don’t think it is worth-while to continue to invest in capital improvements. Just the opposite may be true.
  5. Be upfront about strengths and weaknesses. Surprises are not a good thing in the middle of a deal. It’s best to be honest about weaknesses and put a positive spin on them


"Succession planning is no more, nor less, than taking control of what will inevitably happen."

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