Succession planning and business transition – where to start (part 2)
Mike Fronchak, CPA CMA
My first article dealt with family-related aspects of succession and business transition. Let’s explore other alternatives in this second article.
Selling to key employees
If the next generation of family is not an option for taking over your business, there are other viable options to consider. Key employees are often a workable option for business succession—but they are sometimes overlooked for various reasons. One reason is an owner’s perception that the employee would not have the financial resources to buy the business. That does not have to be a showstopper. There are numerous ways to structure a transaction over time so that cash flows from the business are a main source of financing for the business sale transaction. Staged buyouts, earn-outs, vendor take-back financing, and other methods can be employed in such cases. Having said that, if you see the words “Pay Advance” or “Employee Loan” on more than a few of the cheques you issue to the employee, you may want to consider whether he or she has the ability to run the business successfully.
Another reason business owners may decide to pass over key employees as a succession planning alternative is fear of losing them. You may think that talking about your retirement from the business will create panic among your employees and cause a mass exodus. That’s probably not the case. Your employees know you will not be around forever.
The discussion with key employees does not necessarily have to revolve around your expected exit date. It can simply be a discussion on where they see the business going in the next five to ten years, and where they see their own careers going. In fact, as a business owner, you should have an idea (through ongoing discussions) of your key employees’ career and life aspirations. Having ongoing discussions with key employees will help you determine both a potential succession plan, and a business transition plan to get you to the exit date. Like family, there will be training and development needs for key employees. Like family, they will need to “earn” that leadership role over time.
Selling to outside parties
One of the more obvious, but often most difficult alternatives for an owner’s exit from the business is an outright sale to a non-related party.
As an owner, you may think there are many potential buyers out there, including competitors, suppliers, key customers, investors and even individual entrepreneurs. This is true, and it may not be difficult to identify many of them. The key is to identify the right one, at the right time, with the capability and will to take over your business. It is also important to be able to communicate with these potential buyers without giving away too much competitive information or causing panic among employees or customers. Strict confidentiality is usually a key consideration when looking for an outside buyer. It is often recommended utilizing a professional when choosing this alternative for business succession. Most of my past projects as a business advisor involve sales of businesses to outside interests. Taking on this role yourself as a business owner not only detracts you from running the business successfully, but also requires a skillset that you likely do not have as a business operator. Yes, your lawyer and accountant may be able to help you with financial, valuation and legal aspects of a sale transaction. But a professional M&A advisor can help you put the whole deal together from start to finish, utilizing your team of professional advisors more effectively.
Winding down the business
One alternative for business succession that I do not spend much time on is an actual wind-down of operations, perhaps leading to an eventual liquidation of equipment or inventory. There have been countless times where I have heard of a wind-down or auction of business assets and was surprised that no one was willing or able to take on the business as a going concern. In some cases, the owner did not even consider the other alternatives. I could only imagine that the owner had such low self-esteem that he or she considered the business worthless other than the hard assets that make it up, or had such high self-esteem that they consider the business worthless without their personal involvement day to day. Yes, in some cases, a wind-down or liquidation is unavoidable. I highly recommend at least an initial consultation with a professional as a first step. You may be surprised.
Communicating and reviewing the above alternatives is just the first step in planning for the business owner’s eventual exit. However, having gone through these initial steps, you are at least out of the starting gate. It may be a long road ahead, but again, do not hesitate to involve people who have driven on that road before.
This article was written by Mike Fronchak, CPA CMA, Fronchak Corporate Development Inc. He can be reached at 519-896-9950 and mike.fronchak@rogers.com.