If you have ever downloaded any tools or other resources on our site, you know that we usually ask you about your Biggest Business Challenge in our forms. In response to your feedback, we are featuring a blog series on your biggest business challenges! This post is a response to the challenge of “succession planning."
I grew up in a family business and have consulted with many throughout my career. Family businesses are near and dear to my heart, and I have a passion for helping them succeed beyond the first generation. One of the biggest challenges these unique companies face is developing a succession strategy for the future. This can take many forms and there are a number of drivers that make it an important exercise. Emotions and pride can be a few of the barriers that keep companies from going through this process. Let’s look at a few important reasons to plan.
70 percent of family-owned businesses fail or are sold before the second generation gets a chance to take over, according to a 2012 Harvard Business School study. (Sep 25, 2014)
The two main types of succession planning are organizational structure and those that facilitate the sale of the business. In either case, you need to build the right team so that the business can continue, grow and prosper, secure financing or be sold at the appropriate market value to finance the owners’ next stage in life.
Here are three primary reasons to look at succession planning in a family business:
- The business has hit a new ceiling of complexity, and although the current leadership team has done a great job, it is not experienced enough to take the business to the next level. You hit the growth wall and cannot get past the $10M or $25M mark in sales revenue. The wonderful, dedicated team that got you there may not be the same one that can get you to the next level. Some people can make the leap, others cannot. It does not mean they are bad people or care less about the growth of the company, the position just may have outgrown them and they do not have experience operating in a larger company. Assess the team and develop a strategy to put your existing team in the best roles to match their qualifications while hiring those individuals needed to take the business to the next level.
- The owner is at a mature age and would like to sell or exit the business. In order to maximize the sales price of the business, you must have a team in place that can take the business forward. I have heard more than one banking VP tell me they were investing in the leadership team, not the equipment or business. A very important point to make here is that you cannot wait until you are ready to exist the business to start working on this plan. I have asked many business owners what their end game is and the time frame associated with it, only to hear, “it’s on my list to get to that.” It is never too early to start looking at this as it takes time to put the right team in place to carry the business forward or to develop a team for a transitioned buyout. I have encouraged many owners to have a business valuation done now. Most owners have a good idea of what they want out of the business when they exit and what they think the business is worth. The unfortunate thing is that I have very seldom seen the later match up with the actual business valuation. If you have the valuation done while you still have time in the business, you can see where it comes in and develop a plan to boost the company’s value to where you need it when you are ready to exit. I have always liked the idea of running a business every day as though you were going to sell it. I think this makes you take a very objective view of how the business is run and motivates you to maximize the investment while establishing the future value.
- The business has outgrown the founder. Many entrepreneurs have a great concept, technical expertise and the willingness to put themselves out there to make their crazy idea a reality. They are a jack-of-all-trades and have the drive and inspiration to build a great business. In some instances though, they eventually become the limiting factor. Even though they have the technical expertise and know the product or offering better than anyone in the company, they may not have the leadership skills or desire to run a larger organization. I have seen may founders recognize this and even helped a few make this transition. This can be very difficult as the business is like a child they gave birth to, and they have the belief that no one can run it as well as they can. The key is to find the right position for the founder that does not diminish their contribution and role within the company. Many individuals will move into a role of chief innovation officer if they possess a technical expertise. The individual may not give up ownership and may be the CEO or chairman of the board, just not the President or operational leader of the organization. I have seen many founders put the right team in place to allow them time to focus on their true passions.
I have broached this subject with many business owners and they understand the importance, and want to do the work, but keep putting it off. It is a very sensitive matter, but one that can be enlightening and motivating if approached properly. There are a lot of professionals out there that can help you with these matters. From my experience, it always goes well beyond the legal, financial and insurance aspects of the business. Finding a professional you can trust that can help with a holistic approach can be highly beneficial. The right person can also help navigate and mediate sensitive family issues regarding succession.
So good luck, and I encourage you to evaluate whether or not you have the right team in place to take the business to the next level or allow you to exit at the valuation you need to move into the next stage of your life.
Plan well, and please let me know your thoughts, Alan