By Mark Bronfman, MBA, CPA
In my earlier post on leadership succession planning, I discussed the myths and realities facing owners of middle-market growth stage businesses. Having the right succession plan is one of the shortest paths to achieving the deep fundamental desires of business ownership. Succession planning should position your company as a talent and capital magnet – providing an empowering set of options for the business owner. Unfortunately, much about succession planning is misunderstood and business owners ultimately lose out.
Here is the conventional wisdom: the company’s “business model” determines the eventual success or failure of the business. The nuanced reality is that it is the people and the capital that have a dramatic influence on the company’s success at implementing the business model. Time and time again, leadership and capital succession is the critical human capital enabler that permits a company to succeed wildly beyond their founders’ expectations. For example, my former company Accenture succeeded in the consulting world because our culture enabled us to out-execute the competition.
Too often business owners address succession planning in isolation. Most owners have neither the venue nor skills to discuss executive compensation, capital structure and exit planning with their key people and circle of advisors. Hence the need to shine the light on the succession planning myths.
|Myths 6-10 – Business Owners Capital and Exit Strategies|
|6. Succession Planning is a euphemism for Selling the Company||Succession planning has three fundamental and interconnected pillars: Leadership Succession, Capital Succession and Business Succession. Successful companies proactively address the entry and exit paths for ALL top executives on a systematic basis. Succession planning is less about selling the business and more about re-energizing and re-committing to the future of the business either in or out of its current capital structure.|
|7. A full and outright sale is the most effective way for an owner to “exit” a company||M&A transactions to third parties can be very lucrative and often provide the highest immediate value to selling shareholders. However, depending on the owners’ objectives, many other exit strategies deserve consideration. Consider the following: minority sale to a 3rd party, partial sale to an ESOP, sale to management via a MBO, stock redemption over time, performance-based equity compensation and other solutions. The first question really is: What kind of exit does the owner seek? 1) a capital exit and/or 2) a leadership exit. Avoid the myths by putting first things first.|
|8. I know the “value” of my company||Believe it or not, business owners most often misestimate (high and low) the value of their business by 50% or more. Furthermore, owners fail to understand there are at least five simultaneous and very different “values” for their company ranging from strategic value, financial value, book value, contractual buy-sell value, liquidation value, etc. Knowing when and how to use different valuations can often mean the difference between a joyfully-successful and a painfully-difficult exit strategy.|
|9. Tax strategies do not drive the deal or the type of exit transaction||Tax-reduction strategies can often play a dramatic role in shaping a capital exit strategy. In some cases, taxes “make” the deal – such as with an owner sale to an ESOP with a 100% capital gain deferral on the transaction. Furthermore, taxes always shape a deal when there is an ownership shift across the management team. One time, we transferred 60% of a $30M business at no cost and no taxes to the incredibly successful CEO via a huge redemption strategy. Without this tax strategy, the CEO would have left. Taxes matter a lot.|
|10. My executive team desperately wants me to keep, not sell, my business – so I am stuck||Too often, business owners “guilt” themselves into believing their key people want only one succession outcome: to continue the current business owner structure. However, when we conduct confidential interviews, many lieutenants say just the opposite. They want dynamic careers, transparency in communication and knowledge that plans are in place to mitigate owners’ untimely exit due to health or wealth issues. Be genuine and creative when you explore capital solutions. The succession planning options may surprise you.|
Owners of middle market companies are always slaying the dragons of scarce resources: scarcities of talent, cash and confidence that the business will survive the owners/founders. Succession planning offers the strategic weapons of executive compensation, capital structure and exit planning strategies to overcome these scarcities.
Regardless of where you are in your business owner lifecycle, now is a great time to evaluate your Succession Pathway Options. It takes courage to face the business succession myths head-on. Do the planning, debunk the myths and reap the business, business owner and personal benefits from the planning.
Exit Planning offered through unaffiliated third parties.
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