The Succession Conundrum: Business leaders, the weak link to successors, and the companies who try to finance them (Part 1)
Published by the Canadian Venture Capital Association in Private Capital
Business succession planning is tricky; part old, part new, part money, part emotion; it’s no wonder that so many business leaders put it off. The reality is that an abundance of Canada’s small to medium sized businesses (more than half, according to a survey conducted by the Canadian Federation of Independent Business) don’t have a succession plan at all. Since companies in this category are responsible for generating approximately one half of the Canadian economy, there is undoubtedly cause for concern.
Consider some of the key survey findings (1):
- 51% of business leaders surveyed indicated that they don’t have a business succession plan. Of the 49% that have a plan, only 9% have a formal, written plan
- Approximately 48% of business leaders plan to exit their company within the next five years
- 48% plan to exit their business by selling to buyers unrelated to their family, while approximately 37% plan to sell or transfer the business to family members
- The top barriers to succession planning include finding a buyer/suitable successor (56%), valuing the business (54%), and securing financing for the successor (48%)
Those who have even a moderate interest in the issue of business succession likely realize that various surveys and sources of information have yielded similar results. Delving beneath the surface, however, reveals interesting implications for business leaders, their potential successors, and those who seek to finance the transition, some of which should be sufficient to kick-start those seeking an exit anytime soon into action.
The Business Leader Perspective
Since over 85% of business leaders surveyed identified retirement as their reason for exit, it stands to reason that many have invested a considerable amount of time and effort into building their company. As a result, a transfer of ownership represents the primary opportunity to monetize value that has appreciated over what could be a lengthy period of time. Although this increase might be significant as compared to that of inception, business leaders are often dissatisfied with the offers they receive, which reinforces the need for thorough, early, and practical succession planning to maximize value wherever possible.
What’s even more compelling is how dependent a business leader’s ability to cash out at what they consider to be an acceptable value actually is upon the ability to identify a potential successor who has the: (i) skills to lead the business; (ii) interest in doing so; and (iii) ability to secure financing. This is a tall order, since many successor candidates might only meet one or two of these requirements. Couple this with a lack of experience in terms of developing a business plan to take a company forward in a manner that provides the necessary level of comfort to secure enough financing to close the deal. In the absence of third party financing, business leaders are left with the gamble of whether or not the company, under new leadership, will be able to generate a sufficient amount of cash over time to pay what could be a significant portion of the proceeds related to the transfer of ownership, a scenario that doesn’t end well far too often.
Business leaders and those in the financing field both have a vested interest in terms of how Canada’s succession planning future plays out; the former wants to cash out and the latter wants to roll cash back in. In order to avoid a time-consuming stalemate in a situation where time is of the essence, an opportunity exists to help potential successors become real successors, by providing the tools to take companies forward; the right skills, plan, and leadership ability (and a bit of extra effort to help get the deal past the goal line wouldn’t hurt!). Here’s how:
Business leader skills. Many potential successors have played a second tier role in their careers, without having had the opportunity to ascend to the CEO level. Since the top job can be quite different from what has been the experience thus far, potential successors need a transfer of knowledge, mentoring, and practice in abundance, prior to formally assuming the CEO role.
Existing business leaders can help by creating professional development plans, delegating areas of responsibility in a meaningful way, and taking the time to provide practical mentorship. Potential successors often complain that leaders don’t take the time to provide meaningful coaching; sadly, this is too often the case. Doing so can be the difference between a well prepared leader and one who stumbles out of the gate.
Investor ready business planning. Many potential successors don’t have experience with developing a business plan that is sufficient to secure financing, let alone the process of raising capital. Business leaders who have lost interest in the company, not stepped up internal planning and control processes, or haven’t had the need to seek financing for long periods of time don’t help the process, resulting in a lack of information and competitive positioning to develop a compelling business plan.
Business leaders can make sound business planning a reality by ensuring that the right systems and information are in place within the company to support successors in putting together a plan that can be financed. Making the effort to critique existing business models, consider new markets, and understand important industry developments can help to identify opportunities for the company well into the future, all of which bodes well with financial partners, and, in turn, benefits those who are seeking to exit.
Leadership ability. Those who have spent years at the helm of a company understand the importance of leadership skills, particularly in terms of the impact to the business as a whole. Being a good manager doesn’t ensure that a company will be well led, a reality that is too often overlooked when passing the torch.
Recognizing the value of practical leadership development programs and forums and encouraging involvement can help to groom the business leaders of tomorrow. Starting well in advance and providing practical opportunities to put learning into practice are not only a powerful combination for success, this approach can also identify situations where an individual is not a good fit for a leadership role. Business leaders that do not encourage this type of development are effectively “boxing themselves in”, in terms of viable succession options.
Facilitating the exit. Financial partners can work with companies approaching (or well past) the need for succession by bringing options to the table, in terms of acquisitions, mergers, successor candidates, and other types of transactions. In the case where financial partners identify “to do” items to improve a company or go-forward plan to the point where a succession transaction could be financed, facilitating the introduction to advisors who can help makes all the difference, as the complexities of the succession and financing processes make it difficult for business leaders and potential successors to identify the right advisory resources.
The reality is that business leaders have to “help potential successors to help them”; the same is true for financial partners. In the absence of this approach, it might be difficult to affect a successful transfer of ownership in many cases. Seasoned business leaders know that a big part of their role is to create an environment that will make those around them successful; addressing the issue of succession really isn’t any different, in this regard.
Where does this leave potential successors? This topic will be considered in the next installment of The Succession Conundrum.
(1) Passing on the Business to the Next Generation, Canadian Federation of Independent Business, 2012