Sale of Business

December 30, 2016  by

No Plan for a Succession Plan? 5 Practical tools to get your business on the road to succession planning

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Published by Divestopedia

Every day, business leaders who have been at the helm of their company for many years have fleeting thoughts about what the future might hold.  How long do I want continue to work?  Should I sell my business?  Who could manage my business?  Is it time to make a move?   Perhaps the biggest question may be this: how do I even get started with addressing these questions?

It’s not uncommon for business leaders to meet with their advisors from time to time; to develop their personal post-sale financial plan, establish family trusts, or work through tax planning strategies.  Although all of these are necessary and important tasks, there is often one very important component missing: how to bridge the gap between a post-sale retirement plan and the current state of a company.  In other words, business leaders might be good at planning for life after selling their business, but are not so good at undertaking the succession planning process.   Why is this the case?

One reason could be so simple that it isn’t fully appreciated: many businesses don’t do a very good job of planning, period.  Annual budgets: we don’t need that.  Business planning: too much trouble.  Sales planning: all sales budgets are too inflated to be useful, right?  Technology planning: we just buy the new stuff every few years.  It’s no wonder the succession planning process never gets off the ground.

Here’s the problem with businesses that don’t plan: since planning is a process that is developed through practicing it, these companies don’t have the opportunity to generate competency in this important area.  A disciplined planning process, starting with shorter term and more straightforward plans, such as an annual budget, can help staff members develop the competency to approach more complex initiatives, such as business and succession planning.  What’s more, the corporate history and financial results that are compiled during the process represent an information base that is integral to succession planning.

So, in the spirit of walking before you can run, here are 5 ways to get the planning process started in your company today:

  • Get the right assistance—as with any new task, it can be much easier to design a process and overcome roadblocks by engaging the right advisory expertise. Business advisors that have helped companies work through the annual budgeting or business planning process can provide valuable insight into establishing an appropriate approach and avoiding common pitfalls.  This course of action typically brings far more value to a business than its actual cost, in terms of time savings and identifying best practices for use over the long term.
  • Develop standardized documents—as with any key process, taking the time to develop templates and documents that can be used repeatedly is a much better approach than starting from scratch every time. A standardized budget template, including information to be collected, supporting calculations, assumptions, and financial statements in the proper format can greatly expedite the process and help users become more productive when undertaking a new initiative.
  • Assign roles and responsibilities—the planning process should be the responsibility of all key management team members within a company and not just a task relegated to a particular department. Ensuring that roles are clearly defined and that a number of people are responsible for providing information to be included in the budget, for example, has benefits of at least threefold: better information, planning training across the organization, and enhanced “buy in” of the result.
  • Set (and adhere to) timelines—like any other initiative, the planning process requires formal deadlines that are not simply kicked down the road if they are not met. Planning can sometimes take a backseat to other activities that are considered to be more relevant or immediate, and maintaining this type of attitude will not enable a business to develop the competency that is required to support more complex initiatives, such as succession planning.
  • Keep planning relevant—one of the fundamental mistakes that companies make is failing to keep the planning process top-of-mind, resulting in budgets and other plans becoming quickly irrelevant as soon as they have been developed. It’s critical to ensure that actual results are compared to plan consistently throughout the year (monthly is ideal) and variances investigated and resolved.  It’s no wonder that companies that fail to do this find little value in the planning process.  Even more, striving to meet or beat the plan is the real challenge, so don’t miss out on this valuable opportunity to enhance corporate performance.

Although this might seem like a lot of work, think of it as an investment.  The key is to start today, take a gradual approach, and build planning into your regular business routine.  Doing so will get you one step closer to starting the succession planning process, as well as actually implementing your post-sale financial plan.

in Business & Strategic Planning / Leadership / Succession Planning 2 comments
February 3, 2016  by

Accounting for Business Growth and Transition Course Now Available!

I’m pleased to announce that my new course, Accounting for Business Growth and Transition, is now available!

Growing companies are dynamic places and there are a number of specialized issues that could arise during the lifecycle of a business. These include the complexities related to expanded operations, entering new markets, and undertaking business transactions.  It’s critical to understand these areas proactively, as well as how to add value to the company during the process.

Too many companies barely manage to do the minimum; resulting in the accounting function being little more than a place where transactions are recorded and reports are filed away.  The opportunity to learn how to develop and manage an accounting function that not only helps to improve operations on a day-to-day basis, but also provides a valuable support in times of transition is a powerful one!

This course addresses a range of areas that might be encountered during the evolution and growth of a company. Topics include organizational structures, consolidated financial statements, foreign exchange, due diligence requirements, and understanding approaches for structuring a business transaction.  Those who work in the accounting function will gain an understanding of how to take a leadership role in creating a value centered department that can play a key role in not only a company’s current operations, but also in whatever the future might hold.  Register today!

 

 

in Accounting & Finance / Business Transactions / Financing / Succession Planning 5 comments
September 15, 2014  by

The Succession Conundrum: Business leaders, the weak link to successors, and the companies who try to finance them (Part 2)

Published by the Canadian Venture Capital Association in Private Capital

If succession planning is a challenge for business leaders, potential successors might describe the process as mysterious.  While a business leader or founder has typically been at the helm of a company for some time (if not a prolonged period of time, in many cases), potential successors are often just trying to find a way to get to the table.  One day, the founder is keen to “step back” from the company, while the next day, “retirement” seems vague and far in the future.  For someone wanting to aspire to a leadership (and ownership) role, this type of situation can be a difficult to deal with on an ongoing basis.

Whether a potential successor is a longstanding “2-IC” (2nd in Command), management team group, or family member, their vantage point might provide relatively little information in terms of how the company actually operates, the business leader’s true expectations around succession, and what it would actually take for a transaction to occur.  Add in the mixed messages that can be so common with the issue of succession and it might be enough to cause a potential successor to scramble for the door, vowing to create an opportunity all their own (and on their own terms).

This reality should be sufficient to get the attention of business leaders who are contemplating succession, if not outright relying on it as a means to monetize their ownership position.  Given that a recent survey conducted by the Canadian Federation of Independent Business (1) found that the top barrier to succession planning is finding a buyer/suitable successor (56%), those seeking to exit their business should recognize that finding (and keeping) a potential successor is not to be taken lightly.  Unfortunately, too many potential successors find just the opposite to be the case.

The Successor Perspective

Something that many potential successors have in common is that they are keen; to implement their ideas, take the company in a new direction, and just “get started”.  Many have a reasonable expectation that succession will occur at some point in time, either by virtue of previous conversations on the topic, or perhaps, in the case of a family business, where succession is “expected”.  Call it an informal succession plan.

As a result, potential successors want to better understand how and when a transaction might occur.

This is particularly true in the case of individuals who have invested a number of years working in a company, learning how it operates and directly contributing to building its wealth.  They reach a certain age or point in their careers when they truly need to know: (i) if a succession opportunity actually exists; (ii) when it would occur; and (iii) what the financial implications would be, particularly in terms of the cost to undertake the transaction.  In the absence of this information, a successor’s next best alternative is to move on to other opportunities, and given the effort they have invested in building the company (often, to the direct benefit of a shareholder group in which they are not included), this is understandable.

The Opportunity

Identifying a qualified and willing successor is only the beginning of the succession process, as there is often still plenty of learning to do in order to fully assume and conduct the leadership role.  But even before this can happen, the parties need to be able to arrive at an agreeable value and the successor has to have the ability to pay, either by way of their own funds or through securing financing (in the absence of either of these options, it often comes down to the departing business leader to agree to be paid over time).  Since the  Canadian Federation of Independent Business survey found that valuing the business (54%) and securing financing for the successor (48%) are the second and third highest reported barriers to succession planning, all involved in the process need to take note.

For potential successors to chart their course, there are a number of things that can be done on a proactive basis to better understand the particulars of the opportunity, as well as getting a plan into place.  Seeking advice from those who have undertaken or financed business transactions can help to bring context to the situation, in terms of its appeal and how to help move the process forward.  Here’s how:

Look in the mirror. The truth is, not everyone is cut out for a leadership role. Leading a company, in terms of both the role and ownership aspects, can be significantly different from the experiences of a potential successor thus far, including the scope of responsibility, level of risk, and degree of commitment.  As an example, in the event of insufficient cash flow, owners typically bear the responsibility to inject additional funds or decrease their own compensation to cover shortfalls.  This type of uncertainty might fall outside of a potential successor’s risk tolerance level.

Potential successors need to take a hard look at all aspects of assuming a leadership role, objectively balancing both the risks and rewards of ownership.  Advisors can help by providing independent feedback or helping successors to undertake a self assessment to better understand the types of roles in which they fit best, before proceeding any further.

Assess the situation objectively. Due to the inherent uncertainty that often clouds the succession process, potential successors need to be able to get to the heart of the situation, to first understand whether or not an opportunity actually exists.  This uncertainty is a relatively common frustration, and the reality is that succession is only going to happen if a business leader is committed to undertaking the process.

Advisors can help potential successors to see the situation for what it is, as well as suggest approaches to further discussions with the business leader or how succession could occur.  In addition, successors might need to take action to put the situation in context, by identifying other possible succession opportunities as a comparison.  Although business leaders might not like this very much, the reality is that there are situations where succession simply will not occur, no matter how much a founder might indicate otherwise.

Communicate.  Given that succession can be a sensitive topic, it’s not uncommon for the parties to have difficulty having meaningful conversations around the issue; this can be particularly true in family businesses.  Since succession represents a complex business transaction with numerous details to be considered and negotiated, it won’t just magically happen.  Given the sensitivities, these conversations tend to get deferred and delayed, making succession seem less likely as each day passes.

Starting the succession dialogue between the parties is critical, to map out an agreeable approach, but to also identify situations where an arrangement might not be possible, allowing both sides to pursue other opportunities.  Advisors can help to start the conversation in a non-confrontation manner, in an attempt to find common ground, where it exists, and cover off areas that need to be addressed.  This approach can also help to fill in knowledge and experience gaps that are common in the case of potential successors.

Financial implications. Discussing money is often tough, not just because of the calculations and various financing structures, but simply because the parties might find it difficult on a personal level.  In the case of family businesses, parents might be sensitive to the financial situation of their children, while the next generation might be concerned about not “offering enough” as compensation for all of the work that has been put in to building the company.  Couple this with a founder’s understandable desire to receive fair compensation to finance the retirement they have been dreaming of and negotiations can stall.

Potential successors often do not have a lot of experience in this area, and financial partners can be helpful in terms of transferring knowledge and suggesting approaches that could meet the needs of all parties.  Regardless, those who are serious about taking on a leadership and ownership role at some point in the future need to ensure that their professional development program includes business financing, sooner rather than later.

Although it’s true that good successors are in short supply, all potential successors need to take a hard look at not only what is required of them, but also whether or not the opportunity at hand is viable.  In times of investment (and that’s what succession is), bringing a professional approach to the table is a must to ensure that the right deal gets done.

Source:

Passing on the Business to the Next Generation, Canadian Federation of Independent Business, 2012

in Business & Strategic Planning / Financing / Leadership / Succession Planning 0 comments
October 15, 2012  by

Does your CEO Successor have the Right Stuff? Avoid these 5 candidate types when selecting a potential successor

Published by Divestopedia

For many reasons, business leaders can find themselves at a loss when trying to identify a potential successor.  Part of this could be due to the founder having started the business many years ago and building the leadership role around himself.  Similarly, a particular business can be so synonymous with its founder, that it’s difficult to imagine anyone else actually taking the company forward.  Sounds typical, right?

What does this mean in practical terms, when a business leader is in the process of seeking a potential successor to assume their role?  Financial and transactional issues aside, ensuring that potential leadership candidates are truly CEO material is a key issue; one that often gets clouded by other matters, leaving the business leader in a state of confusion.  Combine this with probably not allowing sufficient time to undertake the succession planning process and watch the desperation begin to appear.  Suddenly, potential successors start to look a lot more ideal than they actually are.

Here’s the reality of the leadership role: CEO’s require the ability to oversee a company across all functional areas, including administration, sales and marketing, finance, products and services, as well as liaising with various external parties, such as financial partners, customers, and regulators.  As a result, a CEO is not typically on the “front line” of delivering services; rather, they reside a level or two above the action so that they have the right sightline to oversee all key areas and resources.

So, if you’re not sure who your successor should be, start off by understanding who the next CEO shouldn’t be.  The following types of candidates typically don’t represent a good choice:

Can’t let go of the detail—some people work at their best on the front line, analyzing information, understanding detailed problems, and perhaps working directly with customers. Their focus is narrow (i.e., departmental, as opposed to organizational), and they might even regard tasks that fall outside of their direct area of focus as an interruption or annoyance.

Although they often excel in their current role, these people, by their very definition, typically don’t make good CEO’s.  The reality is they lack the skills or interest to oversee a company across various functional areas and are at their best when working in a specialized area, such as product development, sales, or technology.  Lots of businesses make the mistake of promoting this type of person to a broader, more senior role than they can handle, when they probably should have been left in their current position.

Winner by popularity alone—taking the approach that being a CEO is all about being popular and liked might be more common than expected. The reality is, CEO’s often have to make tough decisions that won’t be popular, but are in the best interest of the company.  Selecting a successor because “he’s a great guy” or “people will like her” isn’t a good approach.  What a potential successor can bring to the role is what really matters, so don’t get caught up in polls and popularity contests.

Winner by family alone—family businesses bring an added layer of complexity to the succession planning process, and if the goal is to have the company survive for the long term, being a family member isn’t reason enough to be its next leader. Again, skills, experience, and what is in the best interest of the business should prevail, unless you want to be one of those companies that doesn’t last for generations.

Thinks the product is the business—although products and services are an important component of any company, they do not represent the whole company. In the absence of cash in the bank, the ability to invoice and receive payments from customers, a qualified sales force, reliable distribution, and sound operating systems, the product or service alone, in relative terms, isn’t worth much.  Good successor candidates understand how a company as a whole operates and all of the pieces that are needed to operate a business, as opposed to just focusing on products and services.

Doesn’t have a long term focus—leading a company requires the ability to see not only where you are, but also where you are going. Real growth typically doesn’t happen in the short term, and with business cycles fluctuating over time, a good CEO needs to have the patience and ability to ride it out and take the company forward.  Potential successors that are not able to do this typically lack the long term commitment and stability that are required in the CEO role.

Surprised by this list?  The reality is that many business leaders don’t think about succession from this perspective; it’s more about “who do I know?” or “who is the best fit from what we currently have?”.  Instead, it’s best to take a more strategic approach and seek out candidates who really have the right stuff to thrive in the CEO role, now and well into the future.

in Business & Strategic Planning / Leadership / Succession Planning 0 comments