How to Manage Succession Planning When There is No Succession
According to the Price-waterhouseCoopers Family Business Survey, 48% of business owners don’t know how to or haven’t even thought of preparing for the sale of their company. Things get more complicated when there are no family members ready and willing to take over the business. What is clear is that the best business transitions begin early and go smoother when there is a team of people working in tandem to maximize the value of the business and ready it for the transition.
If there is no family to take over the reins of your greenhouse operation, then the logical choices are to transition the business to new leadership and/or your employees (often through an Employee Stock Ownership Program, or ESOP), sell the business outright, or simply close up shop when you’re ready to retire. Since a business can often represent about 80% of an owner’s net worth, I will address the more wealth-saving and positive options of transitioning and/or selling the business.
You Are Not Alone in Your Succession Challenges
The numbers are staggering. 10,000 baby boomers hit retirement age every day, and 60% of all business owners are over age 55. According to recent surveys by the Exit Planning Institute, PNC Bank, and Kent State University, 80% of business owners have no transition plan and have not documented or communicated a succession plan.
Furthermore, 80% of these businesses are simply not saleable, nor do they have the proper talent or family pipeline to continue on. Of the remaining 20% that are sold, 12% will be lower than the original asking price.
The study also discovered that 40% of business owners did not have a plan that covers their forced exit (death, disability, divorce, or illness).
Even though 98% of business owners feel succession planning is important, they rarely have a plan in place. When they do have a plan, there are several reasons why they don’t succeed.
• Many think it is not important and choose to focus on the transition not the transactional nature of a business.
• Potential future leaders and family leave the company looking for greener pastures. Owners do not adhere to the plan, and many continue to stay long past their expected date of departure.
• New leaders are ill-prepared to take over or simply do not perform to the level of the original owner.
• A focus on the past or a mindset fixed on, “this is the way it has always been done,” cripples future leadership and puts the future business in jeopardy.
• Politics, time, lack of commitment, and fear.
Successful Succession Planning = Transition Ready
Not all hope is lost. We have been a part of many succession plans that have been and continue to be successful, and they all share these characteristics.
• The understanding that effective succession planning is more than just transitioning to new leadership, and there are transactional components at work, as well. They take an objective investor’s approach to looking at their business — is the risk at a low level, and is there the potential for a high return on investment?
• Operational Efficiencies: Are there efficient processes and procedures in place that can be easily managed and communicated?
• Financial Strength: Looking at the metrics (ratios, receivables, banking situation), is the company operating at a high level and doing more with less?
• Transition Ready: If the owner should suddenly leave or pass away, how easy would it be to transition to new leadership or potentially sell the business for a high return? What about legal and financial preparation?
Transition-Ready Businesses Are More Valuable
Transition ready means you are not only prepared legally and financially, but also emotionally. We know from our own experiences, especially in a family business, that it is often an emotionally charged and difficult exercise. There are some who can just walk away but many more who can’t, so this needs to be considered when selling your business. Perhaps it is an earn-out or a situation where you ease out of the business over time. This would need to be a part of any discussion with new buyers.
Operational discipline, financial strength, and looking at the business from an investor’s perspective all point to a higher success rate. Here are some other value builders that will make your business infinitely more valuable in the eyes of an investor or buyer. This is primarily what they look for:
• Presence of Recurring Revenue: Consumables, which are usually always present in a greenhouse operation; loyalty programs and subscriptions; sunk money, for example, long-term contracts, recurring purchases, and leases.
• Consistent Sales and Profit: The ability to drive revenue but not at the expense of margin. New product/service offerings, new markets, diversification, and those elements of your operation that deliver consistent sales and profitable results.
• Owner Independence: Can the business operate independently of the owner? Workaholics, who are in their operations seven days a week and micro-manage their businesses, are bad bets for a potential buyer.
• Sales and Marketing: An owner who has all of the key relationships and is responsible for a majority of the sales, especially to larger customers, can be an issue. Are customer relationships spread out among your staff? Are you staying on top of trends? Website, e-commerce, email lists, and social media are all critical for today’s businesses.
• Barriers to Entry: Are there governmental hurdles? How established is your customer base? What buyers look for here are barriers to entry for potential competitors. Location is a critical factor as well — what is your proximity to your customer base and is a competitor angling to move into the area?
• Do You Have a Niche, a differentiator or something you are known for in the community? Is the niche side of the business growing above average?
• Strong Modernized Systems: Do you have up-to-date Point-of-Sale systems and are your processes and procedures efficient? Is the information readily available?
• Bankability: Well-prepared financials, key performance metrics with predictable and reliable cash flow.
Transfer Ownership to Employees or an Outside Buyer
Employee Stock Ownership Plans (ESOPs) can provide a variety of tax benefits for ownership as well as the non-family employees who would want to see the business continue into the future. According to the National Center for Employee Ownership, “ESOPs are most commonly used to provide a market for the shares of departing owners of successful closely held companies, to motivate and reward employees, or to take advantage of incentives to borrow money for acquiring new assets in pretax dollars.” Although sometimes the cost may be prohibitive in setting one up, there are major tax benefits of having an ESOP, especially for an S or C-Corp.
Another option may be to have your existing company leadership buy you out. For both the ESOP and buy-out scenario, whether to employees or an outside buyer, it is critical to have a team of knowledgeable advisors (your financial planner, attorney, certified public accountant, and other key advisors) on the same page to make sure you are financially and legally ready.
It is also important to focus on your emotional readiness with a life or business coach. There is a lot of value in aligning yourself with a well-trained executive search and business advisory group that can help you find your next leader and management team, as well as help you build your organizational bench strength. Instead of planning to fail, we can now plan a clean transfer and a mutually beneficial transition or transaction to a new owner.
It’s hard to transition when no family is in place to take over, but that doesn’t mean the planning should stop. It is more important than ever to get started. After all, succession planning is about preparing for the transition or transaction of your life. Are you ready?