Mark Lobb – IE Business Doctors
If you own a business, it is time to make sure you have a viable succession plan . It is not difficult to put a plan together, but it takes time to do it right. In putting your plan in place, you will need patience, an open mind and a structure. The initial organization of your plan should focus on four elements: (1) timing; (2) your desired liquidating return or what I call the “how much” issue; (3) your target acquirer or what I call the “who analysis” and (4) selecting your professional advisor team. Once these four items are in place, you are well on your way to organizing a successful succession plan.
Your succession plan needs to tie into economic cycles. Assume the economy slowly emerges out of this recession and is relatively robust in seven years. A 55-year old business owner today will be about 62 when we hit the next bull economy. Assume we sustain four years of stability during this robust period in the economy and then we have an eventual decline into another economic valley.
At the point in time in which the economy starts to decline, our business owner will be 66 years old. Let’s estimate another 10 years from the start of the decline in the economy until the economy starts to come out of its valley back into somewhat of a robust position. Now our owner is 76 years old. If you are the owner who is now 55 years old, are you willing to ride out two more economic cycles, or is the next cycle your last?
Depending upon your expectations, it may realistically take seven to 10 years to execute a plan which will yield your desired result. For instance, you may set a goal for a net liquidating return of $10 million. However, the desired return may require a 5% annual growth in revenue over an extended period of time. In other words, it is important to evaluate your goals in the context of realistic economic variables, and to use this evaluation to determine the timing of your goals. After all, all pieces to your succession plan have to fit together and it may simply take time for this to happen.
Additionally, if you are a hands-on CEO, the business as an asset has diminished value if you are gone. Thus, you need to build up your management team and start grooming the future CEO. Often, some members of the existing management team are older and will likely retire when the CEO is gone. Thus, some of the top people may need to be replaced. Many other issues loom and all of the issues will take some time to resolve. If you start planning now, you should have ample time to work out all of the issues during the next seven to ten years.
Once you have determined the timing for your plan, next you should focus on the “how much” issue. How much of a net, after taxes, return are you seeking for your business? Invariably, the minimum net return should be derived from a lifestyle analysis.
You need to focus on your desired lifestyle once you are no longer working full time at your business and determined how much money you need to support that life.
A good rule of thumb is to take your “lifestyle” number and double it. This is the minimum number you should be willing to take for your company. This is a rough estimate, but it is a good working number to use for your planning. Taxes may not take half of your liquidating return, but at least we have room to work with down the road if things don’t work out to perfection.
The “who” analysis
Once the “when” and “how much” issues are resolved, we move on to the “who” issue. Who is your target buyer? You do not have to have the definitive answer today, but you need to start considering your potential pool of buyers.
I often have clients tell me their strategy is to have a competitor buy them, but they have a younger child who may take over the business. The best approach is to set the company up to go to the market and if the child eventually steps up to take over the company, the child will be surrounded by a strong management team, and we can quickly organize a family succession plan.
Likewise, if you are completely unsure about which avenue you seek to pursue, start your planning process with the target of putting your company on the market to sell. Nothing bad can happen from planning in this direction and you can change your “who” at any time.
After you pick your “who,” start surrounding yourself with professionals who can assist you in analyzing your choice of buyer. If you are going to put your company on the market for an acquisition, you should consult with an investment banker and learn about the world of finance in the realm of acquisitions. If you desire to go the route of an ESOP, find an ESOP consultant . It is also important to understand the world of business valuations.
If someone down the road is going to put a value on your company, you should understand how companies are valued and what drives a higher value. It is imperative to consult with the relevant experts now so you can determine whether you are moving in the right direction and packaging your company in the best fashion for your target buyer.
Do not limit your consultations in the early stages of planning to only your lawyer and accountant. I am saying this as a lawyer. Your lawyer and accountant will have good advice, but there are other important advisors in the initial phases of planning. You also need to become heavily involved.
Do your own research. Monitor acquisitions in your industry and find out who is being sold and for how much. If you see a company being bought for an unusually low or high price, try to find out what drove the price.
Do not be concerned about being “right” during the early stages of succession planning. There is no “right” in the beginning. All things may change. I suspect almost every part of your plan will change in some fashion along the way.
A 10-year plan may well become a six-year plan. Your irritating teenage son today may graduate from the Wharton Business School tomorrow and want to be the next CEO. The important thing is to get the ideas in place and start executing the plan. As things change, adjust the plan and keep moving forward.
Don’t end up in your mid- to late-70s wondering how and when to deal with the succession of your company. Make that determination today and get your plan in place.