Succession Planning: An Oft-Neglected Component of Running a Small Family-Owned Business

Small businesses form the foundations of the U.S. economy. But they’re also often woefully ill-prepared for transitioning ownership—even though almost all will eventually undergo a transition. Poor preparation can harm the business, its staff, and everyone who stands to profit from a transition. Here are some considerations owners must undertake.

 

Do the owners understand the business’s fair market value?

The answer is almost always no. Owners tend to be excessively optimistic and emotional, viewing the business as far more valuable than it is. This makes it difficult for them to hear that the business is not as valuable as they hoped.

 

What steps have the owners taken to prepare for a change in ownership?

The statistics are grim. Only a quarter of businesses have a clear transition plan in place. Nearly a third have no plan at all. Asking an owner to plan for a future in which they no longer lead the business can be challenging. The next generation might not want anything to do with the business, and senior leadership may have no plans to take the business over.

 

Strategic advisors can help get the business on the right path. The two sides can work together to create a multi-year plan for an ownership transition. Some guidelines that may help include:

  • Reach out to a handful of advisors who specialize in your industry. You might find that different companies are best equipped to advise you and then value and sell the business. Sometimes a hybrid approach is best.
  • Seek an advisor who can provide you a fair market valuation. You’ll need to understand key value drivers so you can maximize the business’s value.
  • Create and then implement a succession and strategic growth initiative several years before you plan to transition. It’s best to begin the process three to five years in advance of a sale. In some cases, an even longer timeline may be ideal.

There’s no denying that transitioning a business can be stressful. An expert advisor can identify and correct key problems. Expert advice allows you to implement a workable succession plan. It also ensures that all aspects of the business, including financial, employee, tax, and other considerations, are addressed in a way that maximizes value and effectively markets the business. Choose that advisor wisely so you can ensure they have your best interests at heart.

 

 

Two Strategies for Dealing With Employees When You Sell Your Business

The way you address your business sale with your employees can ultimately affect the success of the sale. Owners, experts, and advisors typically advise one of two strategies. Some advocate complete transparency from the very beginning. Others argue that, when employees know a sale is imminent, their morale may deteriorate, along with their productivity. Here is a brief overview of the two strategies.

 

Keeping Employees Informed

Revealing your plan to sell your business doesn’t necessarily require that you share everything. Employees don’t need a detailed blow by blow of the process. Instead, stick to the big picture: the reasons for the sale, how it might affect them, and what you hope to achieve. Manage your staff’s expectations by giving them more information when the transaction is completed. And encourage them to discount any rumors.

Do you hope to sell to a buyer who will retain your existing employees? This information can ease employees’ fears of a job loss, and potentially keep them on board. If you can’t make such a guarantee, emphasize that a strong performance will serve as a safety net, encouraging the new owner to retain as much of the existing staff as possible.

If you feel uncomfortable telling your entire team about the sale, consider sharing your plan with just a few key employees. These should be people who understand the business, and who can therefore understand your reasons for selling, as well as your reasons for keeping the sale quiet. These employees will appreciate your trust in them, and see your willingness to share the sale as a sign of confidence.

 

Keep It Quiet

There’s no denying that a potential sale can spur anxiety, confusion, and even a mass exodus among employees. Knowing this is a compelling argument for keeping the sale under wraps. It may be best to adopt a business as usual approach, particularly in light of the buyer's need to secure financing, the need to ensure all contingencies are addressed, to manage leasing and escrow, and to address other issues.

Employees who know about a sale may even tell your customers. Anxiety about pending changes in management, quality or policies can cause your customers to flee to the competition at a time when this can be extremely damaging to your business.

But what if word gets out in spite of your best efforts? Confront the issue head on, because cover-ups and denials rarely succeed. Immediately convene a meeting to answer employee questions. Don’t delegate this vital matter to a subordinate, or address it only in an email. Address possible outcomes at the outset. That includes the possibility of positions being eliminated. Even if that conversation is a difficult one to have, a proactive stance is always the best stance. And if you’ve encouraged the new owner to retain your staff, you can share this information.

Put simply: by getting ahead of the rumors and being honest, you can ensure you provide information, rather than relying on the rumor mill to do so. Once the cat’s out of the bag, you can’t put it back in. So take control.

Also, a third approach is perhaps a hybrid approach, and although it may seem “unfair”, it’s probably the most truthful approach; that is DENIAL at ALL COSTS! In real world M&A circumstances, transactions are very, very difficult to get done, and can completely blow apart at the last minute (the closing table). It is simply not worth giving employees something extra to worry about that may never affect them. The truth is, the owner has ABSOLUTELY NO WAY OF KNOWING if his business will sell until the wire has happened and the ink is dry. The fallout from the thousand ways informing others can go wrong is simply not worth speculating over. There is a time to address all parties, and that is usually after the close! Buyers also feel their interests are best protected as well.