Plan now for the desired outcome later.
New Direction Partners is an investment banking firm working only in the printing, packaging, display graphics, and label industries, including the dealer community supporting those industries. In our work handling 15 to 20 mergers and acquisitions (M&A) transactions each year, one of the shortfalls we frequently see is a lack of succession planning.
What is Succession Planning?
Succession is defined as the right, act, or process by which one person succeeds to the office, rank, estate, or one another. Yet, the most common perception of the meaning is the end of one era and the beginning of another. It can be, but is not always, the end of an era, especially if sufficient thought and planning has gone into the transition from one owner to another.
Historically, smaller family-owned businesses, such as those common in the industries we serve, have passed the business along to the owner’s children. But increasingly these days, that is not an option. The kids are simply not that interested. This adds to the emotion surrounding the desire of the owner to move on to a new chapter—whether it is retirement or a wish to do something different in the way of work. Although planning for such an event can be emotional, maddening, exasperating, and time-consuming, it can also be very rewarding when done right.
You Need a Plan
If you are like many of the clients we work with, and you are thinking of transitioning to a new chapter, you most likely want, as the basis for a succession plan, to ensure that your team and your customers are taken care of as you exit the business. That takes a lot of thought and planning.
There are two types of plans you may want to examine:
- A Replacement Plan: the process of identifying the candidates who are qualified to replace the owner as the leader of the firm.
- An Exit Plan: the process of identifying the options available to replace the owner as a primary shareholder of the firm.
Let’s first take a look at replacement succession planning and the key steps you should take. These include conducting a SWOT (strengths, weaknesses, opportunities, and threats) analysis of your existing talent, whether it be family members or employees of the firm. This analysis includes assessing the strengths and weaknesses of the business—internal factors—as well as opportunities and threats— external factors. The first step is to determine whether the needed talents and skills to take over running the business are in the business now. Are they ready for the job? Can they be ready with coaching and training? Or worst case, are they not ready or coachable, which means there is a need to look outside the organization? Another consideration, and just as importantly, do they want the job? Don’t assume a person wants that responsibility, as some people are not comfortable having to make the final decision on critical matters.
If you need to look outside the organization, a recruitment process should be undertaken. If there is one key piece of advice I would offer, it’s don’t be afraid to hire people smarter than yourself! You want to hire someone capable of leading the organization for the next 10, 15, or 20 years, and that likely will involve making significant changes as the business evolves.
In terms of exit planning, you, as the owner, have two key considerations:
- Do you know what you want to do after you are no longer involved in day-to-day operations?
- Do you have the resources to do what you aspire to do after the sale?
Succession Planning Takes Time
It’s also important to think ahead. It takes time to prepare the business for a transition like this. In our experience, it can take up to 36 months to prepare the firm for a sale, and an additional nine to 12 months to transfer ownership—in other words, to find a buyer and close the deal. Then, in most cases, the owner will need to stick around for six to 24 months for an orderly transition. And you’ll want to do this to give the new owners the best opportunity to continue with a successful business and to ensure that your employees and customers will be well taken care of.
Five Key Elements of Succession Planning
In summary, the succession planning process has five key elements:
- Determine the objective: What is it you want to do next, and what do you desire for your employees and customers? Do you own the building and want to keep tenants there (your business or another one)? Do you want to get out from under bank personal guarantees? Do you want to ensure your spouse is taken care of? These are just a few possible objectives.
- Timing: Have you set a goal for an exit from the business? If you have, then plan backwards to account for the three to six years, or longer, that it will take to get the business ready, conclude the sale, and stick around for the two years or so afterward to ensure a smooth transition. This is often a requirement of the deal.
- Financial: What’s the financial status of the business? Will a buyer see an opportunity to continue with a profitable business? If not, what can you do to get the business into better financial shape? This is part of the up to 36 months of pre-planning before you actually go out to seek a buyer or find one internally.
- People: Do you have the right talent in place to ensure a successful future for the business? If you take your leadership out of the picture, can the current staff carry on with a profitable business?
- Assessment: This is where the SWOT analysis comes in. This is not a one-and-done. You should revisit it periodically, and you should be brutally frank in making this assessment. The future of the business depends on it. Plus, it’s your job!
Types of Buyers
Post-pandemic, we have not seen a slowdown in M&A. In fact, we seem to be busier than ever as more owners look to move on to the next adventure. There’s money out there, and there’s an increased interest in the industry.
As part of your due diligence, you’ll want to consider the type of buyer that best fits your needs. These include:
- A Strategic Buyer: This buyer is typically a successful business in the same industry that is looking to expand geographically or functionally. It will likely do some consolidation when acquiring the business since there is probably some overlap in staff responsibilities, including administrative functions. It also may wish to do a tuck-in, in which case, it will be acquiring your book of business and won’t be that interested in any equipment, buildings, or other physical assets you have, leaving you to decide what to do with that.
- Private Equity and Family Office Buyers: Many private equity firms will be looking to grow the business and sell it after a few years to recoup their investment. Family office buyers are more likely to want to keep the business indefinitely.
- Search Funds: A search fund is an investment vehicle established to support one or a pair of entrepreneurs in their search for and acquisition of a single, privately held business. Search funds are generally looking for a single company in which they can take an active role in operating the business post-acquisition, while a private equity firm might take a more hands-off posture.
Lots to Think About
I have provided a lot of food for thought, but the most important message is that every business should have a succession plan in place. You never know what the future will bring and having a current succession plan in place, and working toward all the objectives, financials, and other criteria we’ve discussed positions you to take the necessary time to move through an orderly replacement or exit strategy and enjoy the next chapter with the least amount of stress.
Once you have your plan in place, be sure to keep it updated as conditions change, people move on, your goals change, etc.
It may be a little self-serving, but it’s important to engage professional help as you work to improve the valuation of the business, do your SWOT analysis, and begin seeking potential buyers. Whether it is New Direction Partners or some other professional, these folks can help smooth the way to achieving the desired result. Choose someone who has your best interests at heart, who has a robust Rolodex of industry contacts, and is someone you feel comfortable with. It can get difficult, and having someone you trust to help you through the process can make all the difference.
About the Author
Prior to New Direction Partners, Jim Russell was president and chief executive of Arbor Press in Royal Oak (Detroit), Michigan. During his tenure at Arbor Press, the company was recognized as an eight-time winner of the National Association for Printing Leadership’s (NAPL) Management Plus Awards program that recognizes the best-managed graphic arts companies in the country. Arbor Press was also recognized twice during Russell’s leadership as one of the 50 fastest-growing printers in the country.
While serving as president of Arbor Press, Russell simultaneously served as president and CEO of RBF, Inc., of Lansing, Michigan, an industry leader in the document management industry. He has hands-on experience as both buyer and seller, having completed many different acquisitions and sales during the time he served as CEO of the family-owned businesses.
