Leaders need to prepare for the future of their company. “If that company is part of your identity, why not do succession planning?”, asks Beth Savage, President of PQ Systems, in this video featured on Forbes. Beth was part of a team that built a plan for succession that was implemented when the founder of PQ Systems unexpectedly passed.
The key to the plan and process was trust and communication, says Beth in the video: “We realized that before we could really move forward with strategic planning, we needed to know what was going to happen with the company. Once that was communicated to the company, it was like a weight lifted.”
Larry Grypp, President of the Goering Center for Family & Private Business at the University of Cincinnati, agrees that trust and communication are critical for any succession or contingency planning. As a non-profit organization, the Goering Center is a leading educational and informational resource center for family and closely held businesses. Larry says there are several factors that should be a part of the succession planning process:
It’s never too soon to learn the strategies, techniques and ways to develop trust in an organization. “If you don’t have trust, it’s going to be very difficult to have a healthy, effective transition and succession.”
Effective communication and conflict resolution skills
Closely tied to trust, having proactive communication is critical throughout the entire process. “How do we learn to communicate well with one other so that we show respect, and so that we let people express what’s going on in their head?” Effective communication engenders the possibility to have deep trust.
A team to help you transition
A network of advisors and peers will be important for a business owner as he/she transitions. Having an outside board is also invaluable.
A defined and shared purpose
The mutual vision and goals of those involved must be articulated and understood. The goals and objectives will be different for every business owner, and can even vary by generation of business owner. Because a founder spends so much time thinking about the business, growing the business, developing the culture, the strategy, their goals may be very different from the second generation era. Different generations will have a different outlook and a different decision making process that should be accounted for.
Valuation and development of financing options
Depending on what the owners intend, there is much work to be done to prepare and set up a company for its best possible transition. “Everybody values their company differently than what it really is worth, and the real value is: what’s a buyer willing to pay?” adds Larry.
Optimization of legal and tax structures
Another part of the process is looking at tax and legal ramifications. “That’s part of why this is not done in several months or even one year. It takes an extended period of time to really develop someone that the owners, employees, the vendors, the banks, and others can all trust to move the company on after the original or the retiring or exiting owners leave.”
Every entrepreneur will exit with or without a plan in place, but Larry shares the 3 main types of transitions to second or third generation owners:
- Internal transaction: This could involve handing down a business from one generation to the next, or it could be an internal sale where control is transferred within the company among its leaders.
- External transaction: A strategic buyer is typically a buyer in the same industry.
- Private equity groups: PE Firms (also known as PEGs) are buyers outside your industry.
It’s never too soon to start planning, even if a business owner is unsure of what the exit will look like. “If owners can acknowledge that they do not know which of those 3 options they are going to choose when they do make the eventual transition, they can at least understand what those 3 types of buyers are going to look for, and what they—the owner—needs to get ready for.” If you’re going to sell to a PE firm, it’s a whole different set of criteria and work to be done rather than if it’s an internal sale or transition, for example.
Once goals are shared and decisions start to be made, a plan of action will need to be developed, as Beth also explains in the video above. “No matter what your exit strategy is—internal, strategic buyer or PE firm—team members have to know that the strategy is going to be a winning, opportunistic strategy for the future,” says Larry. “People need to be working on their strategy, including their successors.”
LaRosa’s, Inc., a chain of pizza restaurants located in Ohio, Kentucky, Indiana and Tennessee, is an example of a company with a business owner, Buddy LaRosa, who was able to be proactive and forward-looking about his company’s succession plan.
The company, a Goering Center member, was founded in 1954 by Buddy (and partners whom he eventually bought out).
When it came time to thinking about his eventual exit, Buddy chose a non-family member executive, T.D. Hughes, to continue to grow the company. As a LaRosa’s veteran that was trusted by Buddy, having T.D. at the helm provided Buddy’s sons and daughter the opportunity to grow and continue to learn from the business.
After 54 years in business, Buddy was able to successfully complete the leadership transition of his business to his son, Michael LaRosa, as CEO, and to T.D. Hughes as Chairman of the Board. “It was a great example of making decisions that were healthy for the business and kept the business growing and prosperous.”
“When we think about succession, and what somebody started or subsequent generations now lead, it’s so critical that they think through these issues,” says Larry. “Doing so will give them the best chance to have their company, their employees, and what they do in their communities, to all have a successful future.”
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