Survey highlights succession planning in middle market businesses
Poor succession planning can erode the value of a lifetime of success
INSIGHT ARTICLE |
Jack Welch, the former General Electric CEO, spent years formulating a succession plan, then spent several more putting it into practice. Warren Buffett has been talking about succession since 2006, and he’s still at the helm of his company, Berkshire Hathaway.
Yet many companies don’t begin succession planning until it is too late. It can be awkward for a board of directors to interview candidates for a CEO position that is not yet vacant. Family businesses come with their own set of issues, often involving higher emotional stakes than those involved at larger companies. Selling a company requires rigorous planning, but letting go can he hard. No matter how hard it is for a business owner to think about stepping down, however, it is never too early to start planning for succession. Planning could be the difference between selling your company and giving it away.
The fourth quarter RSM Middle Market Leadership Council survey highlights some key succession planning issues that business owners should consider.
When is it time to sell?
Whether succession in a particular business involves transfer to an outsider or a family member, it may well involve a formal transaction of some kind. The survey found that 34 percent of respondents had received a formal offer for their business, but 88 percent opted not to sell, saying it “wasn’t the right time.” Among those who had not received an offer, only 22 percent said they were likely to sell in the future, which raises the question of how they will transfer ownership. Given that eventual succession will likely involve a transaction, the real questions are when is it time to sell? And how do you prepare?
The answer will vary with every business and every owner. Some owners are ready to retire at 55 while others plan to work decades longer. Industry valuations need to be considered. Owners of a business in an industry where valuations have peaked may want to consider selling sooner, while those in an industry with low current valuations, as is the current situation in the energy sector, might choose to wait. Some owners need a liquidity event to transition to retirement to meet their financial needs.
Planning, however, is vital in any case. Business owners need to consider a variety of factors:
- What after-tax proceeds do you need on the sale to meet your estate planning, lifestyle, charitable and other goals? Sellers must understand and determine their core capital requirements—the capital needed to support their lifestyle needs and wants for their lifetime. Excess capital above and beyond their core needs is available for gifting to family members and to charity.
- What steps do you need to take to prepare your business for sale in order to maximize return?
- What role, if any, would you like to play in the business after the sale?
Answering those questions takes planning. If you receive and offer before you have done that planning, you may not be in position to take advantage of even an attractive offer. And, of course, economic, personal or other events could put you in a position of having to consider a sale on short notice. With planning in place, you are ready for either case.
How long does succession planning take?
Clearly, succession planning matters. Yet 25 percent of survey respondents reported having no succession plan in place for the departure of key leaders, and 45 percent described their succession plans as largely informal.
If you jump into a transaction without proper plans in place, the possibility of a failed transaction is very real – and very expensive. It takes time for owners to be mentally prepared for succession and to execute the planning necessary to help it go smoothly. Preparing for a transaction for a business with a single owner takes a minimum of 24 months. For family businesses or those with multiple owners, issues are more complex and planning can take much longer.
What role does the owner want to play going forward?
Some business owners sell the business and walk away, but nearly half the executives surveyed said they would like to continue in their current role after the sale. Understanding and preparing for that role also takes planning. After a sale, the former owner should plan on playing a transition-type role, not on being a controlling player making every decision. Owners must realistically assess their readiness for that role and be prepared to help the new owners position the business for future success.
What is the RSM Middle Market Leadership Council Survey?
The RSM Middle Market Leadership Council Survey delivers key insights from a representative sample of middle market business leaders. A total of 700 senior executives were recruited by Nielsen via phone using a Dun & Bradstreet sample and invited to participate in four surveys in a one-year period. All respondents were qualified as U.S. full-time senior executive decision-makers. The fourth quarter survey interviews were conducted from Sept. 22, 2015 to Oct. 16, 2015. Of the 700 recruited executives, 209 completed the fourth quarter survey.