It's your baby. You built it from the ground up and want to make sure it will be in good hands when you surrender the reins. But magical thinking won't make it happen. You need a well-thought-out succession plan if you want a say in how your business does after you’re gone.
It doesn’t matter whether you’re the sole proprietor or have one or more partners. You need to begin planning now to make sure the business undergoes a smooth change of command and that the legacy of your hard work will live on.
Here are five things to keep in mind.
Choose your successor well
The tremors that cascaded through the tech world in mid-January when Apple’s Steve Jobs announced that he was taking yet another medical leave shows how important it is for a company to have a clearly outlined succession plan — particularly when the company is identified so strongly with one person.
Al Weatherhead was forced to address that question when he began looking for his replacement at Weatherchem, a plastics manufacturing company he acquired and built up from a modest size three decades earlier. Age — he was approaching 80 — and a desire to breathe fresh life into the company prompted his decision, he told BusinessNewsDaily.
“I decided to replace myself,” said Weatherhead, who represented the third generation of a storied Cleveland manufacturing dynasty. “It’s absolutely necessary for the happiness, growth and continuity of a company to replenish the management. Nothing creates more turmoil for your employees, customers or suppliers than poor succession planning. You just can’t leave it until the day you die.”
But the fiercely independent Weatherhead was not looking for a doppelganger or clone. He said he hired a much younger “lady president” on the recommendation of the dean of Ohio’s Case Western Reserve University, where his successor-to-be was getting her MBA while working for Nordson, an industrial manufacturing company.
“The dean said I should steal her from Nordson,” Weatherhead said. “I hired her. And I hated her. I wanted to fire her. She didn’t do anything the way I wanted to do. She stole my job from me.”
That was in 2004, and in short order, she doubled the size of the company and won over the Weatherchem work force, most of whom were longtime employees, averaging 22 years with the company.
Weatherhead, who turns 86 this month (Feb. 17), has two sons and daughter, all of whom had tried their hand at working for the company.
“They didn’t care for it,” he said. “If you’re following in someone’s footsteps and are being handed a job, you don’t have the passion to build something on your own. That passion to build something is a nontransferable gene.”
All too often, succession planning takes place after the fact, when an owner is incapacitated or dies. This is an emotionally fraught environment, one that’s not conducive to good decisions.
“In a worst-case scenario, a single owner dies with no succession plan,” said Louis Berger, a co-founder and principal of New York’s Washington Square Capital Management. “It can be emotionally charged; it can become ugly.”
The owners of a business should create an exit plan well in advance, Berger said. They need to determine what should become of the company when they are no longer involved and to execute a buy-sell agreement that is explicit about who is going to take over, and what events will trigger the implementation of the agreement.
“It’s almost like a will for a business if something happens to a partner," he said. “It’s important to have these conversations from day one if you’re talking about a partnership. There’s no harm in open communications and having the conversation too early."
Having a handshake agreement is nice, Berger said, but all the details need to be spelled out.
“Making assumptions is fatal,” he said.
Get your financial house in order
For many small businesses, bookkeeping is a problem. Personal and business expenses often commingle and become difficult to separate.
It’s important to have clean books that conform to GAAP (Generally Accepted Accounting Principles) standards, said T.J. VanVoorhees, a co-founder of Pacific Crest Group, consultants for small and medium businesses in the San Francisco Bay area. Make sure you have sufficient reserve capital to pay off liabilities, VanVoorhees said.
If you hope to sell the business to an outside buyer, you want to show consistent profits over time.
“The last three to five years of financial records are critical,” VanVoorhees said. “And you need to clean up forward-looking actions.”
You should consider locking in long-term contracts with clients, to show prospective buyers a recurring source of revenue. You also should give consideration to locking in key employees through contracts, stock ownership programs or other programs that give them a vested interest in staying aboard. In employee contracts, you also may want to insert a non-solicitation clause, to ward off the eventual poaching of your clients.
“These are the people who keep the company running when you’re not there,” he said. “If a job can be replaced, they’re not a key employee.”
Prepare to take time
Good succession planning can’t be done overnight. It requires thought, data and a vision for the future.
“Where people get in trouble is when they decide to sell and want to do so within the next three to six months,” said VanVoorhees. “Give yourself lead time.”
That’s especially critical if you’ve made yourself indispensable to your business. You need to change your operation to the extent possible from being person-dependent to being system-dependent. You want to be able to present a buyer with a turnkey operation.
The key is systems. Everything has a system around it, VanVoorhees said. Having best practices, for example, is a system; it codifies the way you deliver services.
How can you tell if your business is turnkey?
“Ask yourself, ‘Can I go away for five weeks?’” VanVoorhees said. “If the answer is yes, you have a turnkey operation. If you can’t take a vacation, you’ve got a problem.”
Gary Pittsford, the president and CEO of Castle Wealth Advisors in Indianapolis, agrees on the importance of taking time to develop a succession plan.
“The most overlooked aspect is putting together a plan several years in advance,” Pittsford said. “Most owners don’t know how to attack the problem.”
You get to sell your business only once, said Pittsford, so it pays to pick your buyer well.
“We’ve got a lot of Baby Boomers who are going to retire in the next 5 to 10 years and sell their businesses,” he said. “Roughly 40 percent have children who will buy out the parents. Twenty percent have key employees who will buy the company, and another 10 to 15 percent can sell out to another person in the same industry.
"That leaves 25 to 30 percent with no other options. That scares them. In some places, it’s hard for them to find a buyer.”
Having children waiting in the wings to buy the company doesn’t necessarily make life easier for a business owner. Solomon-like decision-making is often needed to settle on the heir apparent, and many parents fear that if they pick one, they’ll alienate the others.
“Most business owners tell me that they want to be fair to all their children, but it’s sometimes hard to do if one child is going to be receiving the family’s largest asset,” Pittsford said.
One solution, he said, is to transition voting stock to one or two children and nonvoting stock to other children who may not be in the business. There are many ways to usher a company to the next generation, but all the options need to be considered when you talk with your financial advisers, attorneys and accountants in setting up your succession plan.
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Reach BusinessNewsDaily senior writer Ned Smith at email@example.com. Follow him on Twitter @nedbsmith.