Everybody Exits

We work with business owners across industries and at the extreme ends of that range of businesses, there aren’t a lot of commonalities. Asset-based businesses vs. service-based businesses, relationship vs. transaction-based businesses. But fundamentals hold true even at the extremes—earnings drive value. More and predictable earnings are better than less. And every owner exits their business eventually.

Owners of a single business exit only once and their first business exit is also their last. Of all business owners, 79% will exit in the next 10 years. Only 25% of those owners are confident their teams can proceed successfully without them. Transfer of ownership, as opposed to selling to an unrelated party, as a strategy has grown from 52% to 79% recently. Even so, only 17% have a written exit plan.

This Redbank Monograph, focuses on business succession.

With or WIthout a Plan, Everybody Exits

Some owners exit suddenly upon their death. Some owners conduct an orderly transition assisting their successor in assuming and understanding the duties of the top officer. Some have a plan and some wing it. Not all exits can be anticipated or predicted, but in EVERY case, a plan can be in place. A good succession plan can provide for the unexpected or sudden exit as well as the orderly, planned exit over time.

Our owner clients believe it would be better to plan for their loved ones and their teams rather than to leave them to struggle through the transition, possibly while they are also grieving. And yet, the 17% statistic holds that less than one fifth of companies have a written exit or succession plan.

First and Last Transaction

Business sales normally involve an inexperienced seller and an experienced buyer. Serial entrepreneurs may have the luxury of selling more than once and thereby gain experience at the sell side transaction, but most owners only exit once. This places the seller at a disadvantage against buyers who have conducted multiple transactions. There are two edges that a seller has that the buyer never does though. The seller has insider knowledge, and with planning, can control the timing. Two edges which can be capitalized upon with planning, but which are neutralized without planning.

In the case where the buyer is friendly or even possibly favored in a transaction such as a transfer from a parent to a child, planning will still minimize value loss through taxes and other friction during the transition. It can also increase the quality of the transition, building the skill and experience of the next leader.

Helping the Next Generation of Leadership

Owner preference is trending toward transferring businesses to family or employed parties rather than to unknown third parties. The number seeking a related rather than unrelated transfer has grown by more than 20% in the last four years. Whether that next generation is literally the next family generation or it is the next logical generation of professional managers, conducting the transition in an orderly fashion over a period of years will help drive the value of the business in the near term as well as the long term, increasing the value of the business at the time of the transition AND the likelihood of success of the next leader, which increases the future value of the business.

The Right Way

There is no single approach to succession that works in every instance. It’s complicated. Unfortunately, this leads to avoidance. However, this is a cop out on the part of the owner. Too much is at stake. Successful exits are carefully planned to fit the needs of the principals and the business. No two plans are the same. And they shouldn’t be. Succession plans need to be specific and as unique as the individuals involved. Let’s look at three family business situations.

The Obvious Choice

This can be the easiest eventuality to plan for. There is a single candidate for succession and he or she has exhibited excellent judgment and leadership skills over the years. No one else makes sense and everyone seems to expect that individual to take the reigns when the time comes. In this case, a series of assignments and outside experiences can be laid into a plan to develop weaknesses and build on strengths until the individual is ready (or until this business is ready). These could take the form of increasing responsibilities within the business and perhaps a tour of the major functions of the business to provide a well-rounded experience base for the leader. This can be augmented with outside experiences like leadership development programs or a succession coach.

Even in this straightforward case, however, some contingencies need to be accounted for. For instance, what happens if the transition is forced prior to the preferred timeline? This might be forced due to illness or untimely death. This contingency can be mitigated through provisions in the plan. Provisions can be made for a board of advisors to guide the individual in their development until the time of transition. This can be a powerful developmental tool even in the normal course of business. A team of outside advisors can do much to broaden a candidate’s perspective and grow them beyond the capabilities of the parent/owner.

No Good Option

Another situation arises when there are no good options. No children in the business perhaps and no up-and-coming leaders in the organization. While this situation seems hopeless, there are very good options available. First, a contingency plan must be put in place for the case of unplanned transition. An outside board like the one in the prior example is an excellent option. In addition, designate an interim leader with the experience to provide leadership on short notice in response to an emergency for the purpose of guiding the transition.

With the emergency provisions in place, the long-term plan can be put in place either to develop a possible candidate internally or to identify external candidates who could be hired with the expectation of taking the helm. These can be hired with the eventual expectation of being able to acquire the business, with a buy/sell agreement or not. If not, then the eventual ownership of the business must be provided for, and the future owner(s) must be prepared to serve as owner-investors providing leadership and direction to an operating leader who will run the business.

Multiple Good Options

This case is perhaps the most difficult emotionally for owners to resolve. There are multiple potential leadership candidates. Perhaps all beloved children, making the decision difficult.

The best solution to this dilemma, even though emotional, is to decide in advance which of several good options will be best for the business. Properly planned and managed, this approach can defuse the emotions and enable a solution that provides something valued and rewarding to each candidate, whether inside or outside the business.

If this sort of orderly, planned transition is not possible, an outsider might serve as an alternative. An outside candidate that is qualified could help to defuse family tensions over a decision. Multiple good choices make this decision even tougher while grieving. It is important to put a written plan in place and discuss it with the principals involved.

These scenarios sketch out the range of possibilities and the fact that a plan can be developed for any specific situation, and that the issues involved are challenging and emotional at times.

The Bottom Line

Without a plan, the complexities of succession planning and ownership transition make it unlikely a good result will occur. However even in the event of a sudden, unplanned transition a business can conduct an orderly transition in both leadership and ownership. If you don’t have a plan in place now begin the process immediately. You never know when you will need it.

About the Author

Jim Lane is an American management consultant, educator, and author, who has contributed to the development of hundreds of family-owned and Fortune listed businesses.  Lane is a former Partner in Ernst & Young Consulting and is also a leader in management education, he founded the Clinic for Professional Services Leadership at the Fisher College of Business and he has been affectionately described as “the CEO whisperer.”  Lane currently serves as Founder and Managing Director of Redbank Advisors a management consulting firm.

Jim is active in several community organizations, including a Trustee for Bill & Edith Walters Foundation, Board Chair for the Midwest Biodiversity Institute, and Board Treasurer for the Ohio Biological Survey.  Jim is also an award-winning wildlife photographer.

For more information contact Jim Lane at jlane@redbankadvisors.com or (614) 361-3679.