J. Benjamin English, Partner, Hirschler Fleischer
Regardless of their industry, chief executive officers inevitably confront the need to transition ownership and management of their business to others. Whatever form this transition takes — to the next generation in a family business, to a management team buying out the owner or to a third-party buyer — it involves a new set of risks and opportunities that differ from those encountered in normal operations. A CEO must be prepared to meet these challenges through a process of succession planning.
Below are some key considerations to keep in mind when considering a succession plan:
Know yourself. Are you really ready to put your business in someone else’s hands? For many CEOs, their company is their “baby” and life’s work. Take the time to think through these “soft” issues and consider your emotional attachment to the business.
Know your objectives. As with most things in life, you won’t get there if you don’t know where you are going, so define your objectives. Realize that there will be inherent conflicts among these goals. For example, you can’t walk away from your business with maximum value and minimum risk while also keeping it in the family. Determine your priorities and make compromises to resolve these conflicts.
Plan ahead. No business is perfect and each requires work to prepare for succession or an exit. Maybe you need to beef up your management team or improve financial reporting systems. All of this planning takes time, and the need for the succession plan may be driven by factors beyond your control, such as personal health issues or availability of financing to a potential buyer. Develop your plan three to five years ahead of when you hope to implement it.
Know when to go. Owning and operating a business has its ups and downs. It is tempting to hang on when things are going well, but that is the best time to sell. You don’t want to exit when profitability is down. You want it to be a transition, not a turnaround.
Understand value. The value of a business derives from various factors specific to that company internally or factors affecting the market or the economy as a whole. Understand the key value drivers for your business and how to use them to your advantage when planning your succession.
Get your “house” in order. Risk — real or perceived — reduces valuation, and the succession or sale process will spotlight every risk in the business. Assess and address these risks, with a particular focus on quality financial information. If a buyer or a lender can’t trust the numbers, a good result is unlikely.
Be ready for non-business issues. Particularly in a family business, some of the most vexing issues have nothing to do with the business and everything to do with the people involved. What if the heir apparent to the family business doesn’t want to take over and run it? Anticipate and prepare for these discussions.
Know your buyer. Few business owners walk away with a bag of money and no other concerns. Most will have an ongoing relationship with the buyer, and it’s important to know something about him or her. How does the individual handle issues that inevitably arise? What about your earn-out, or your employees? Do your own due diligence. Talk to others who have sold businesses to your buyer and learn from their experiences.
Change is never easy, nor is it avoidable. Systematically addressing these issues with a team of competent advisors will position a chief executive for success. Regardless of succession or exit considerations, these actions will result in a stronger business.
About the Author
J. Benjamin English is a partner with Hirschler Fleischer (Richmond, Va.). He helps growing companies develop practical solutions to legal issues. Among other business decisions, he advises on structuring entities, and provides guidance related to business plans, capital structure, financing, shareholder agreements, employee compensation and benefits, and intellectual property matters. He may be reached at (804) 771-9544 or by email at firstname.lastname@example.org.