Planning for business succession

"The thought of not being around or not being connected to your business, which you are in most cases emotionally connected to is a huge factor in folks avoiding the idea," said Steve Gierasch. - (Photo / Amy Spangler)

When they first set out, business owners see a road of endless opportunity. They rarely imagine the end of that road. So when they get there, they’re often unprepared.

The Central Penn Business Journal convened a panel of experts to discuss the value of thinking ahead when it comes to business succession planning and the steps owners can take today to ensure they are ready.

The discussion, moderated by CPBJ editor Joel Berg, focused on both the financial and emotional stakes for owners contemplating a sale or other transition for their business.

The participants were:

Business owners usually wait to begin succession planning until it is almost too late. What are some of the triggers that actually get them thinking about it?

Amy Spangler

Bruce Brown: I think it’s health and age. I think they believe they’re invincible and they wait until it’s a little too late and then they start the process.

Scott Pinchak: It is the five D’s: death, disability, disagreement, divorce and distress. The ones that are most prepared not only recognize that, but they plan ahead.

Steve Gierasch: The thought of not being around or not being connected to your business, which you are in most cases emotionally connected to is a huge factor in folks avoiding the idea.

John Dame: One of the other things is having a kid or somebody that wants to come into the business. Often people really don’t plan too well for their kids coming into the business. And that creates a whole other issue with transition.

Gierasch: I think it also has to do with the market, especially the kind of market we’re in right now. You have business owners who feel like they don’t want to miss the boat, because there is a lot of M&A activity. They read about it.

Dame: Or not wanting to go back to 2008, 2009, 2010. I think that’s an even bigger issue. People do not want to experience a downturn like that again.

Brown: I think a lot of it has to do with they need to be nudged. We call this concept exit planning and that sounds like it’s too final and I think that keeps a lot of people from doing it. And in our practice at least, we try to be proactive and say, “You have to think long term.” This is a long-term process. It’s not “wait until two or three years before you’re getting ready to retire.”

Bob McCormack: I think Bruce is right. Having advisers that reflect on continuity planning helps them start that planning process well in advance. But without the nudge, many people will just want to go on day to day running their business.

What kind of nudge usually works?

Amy Spangler

Gierasch: In some cases, horror stories. All of us have clients who failed to plan, whether it was estate or succession planning, and in other cases went through an acquisition or sold their business and didn’t do the proper tax planning and then they end up with far less than they expected.

Pinchak: It’s also the success stories. We’ve all been part of really good, successful deals. Describing that as well is helpful: “Hey, this is how XYZ business owner did it and here is how it worked and here is the outcome.”

Brown: Because we see clients several times a year to talk about financial matters, it’s a little bit easier for us to ask, “So where do we think the company is going? Do we have the next generation coming in?” We also talk about the value of the company, and that gets it started with an “I really don’t know. If I look at my balance sheet, my net worth is $2 million.” And I’ll say, “That’s not what your business is worth.” And that kind of opens the door.

What’s the breakdown typically between the strategic planners, the ones thinking ahead, versus the ones who have a disaster and they’ve got to respond?

McCormack: We’re probably seeing seven out of ten who don’t plan until that disaster or near disaster or retirement is approaching. I think it’s been evolving in recent years that a lot more people are planning. But historically, it’s been not a lot of planning.

Pinchak: Because they’re too busy working in their business, not on their business. And they’re busy putting out fires and they’re building a lifestyle but not necessarily building enterprise value.

Brown: In the past when people hit 65, they were ready to retire. And you look at the people that are in their early to late 60s today and they’re still vibrant and they love what they’re doing. And so it’s not the hot topic that you would think it is yet. But I think with everything they’re hearing about exit planning and strategy, I think we’re going to see more of it.

We’re also seeing more people in their 50s thinking about selling than you would have seen two years ago. What’s driving that?

Amy Spangler

Dame: I think people are saying how much more up is there in my business, in terms of more valuation, especially if they’ve been doing it for a while. They say, “I don’t want to take the risk anymore,” that the marketplace is changing. “I don’t know if this business will be viable five or 10 years from now. I don’t have any kids or my kids are too young.” And they believe that it’s an opportune moment. Valuations seem to be good right now, for the most part, for good companies, and there is a lot of money available to buy. So people say I’ll just take a flyer and see what happens. And some of them have been really pleasantly surprised.

Gierasch: It is the perfect storm of events, not the least of which is you’ve had several years to have great economic results. The market has a lot of cash that buyers are looking to deploy. And it follows a once-in-a-lifetime event in 2008 and 2009. The scariest thought, I think, for a lot of folks is not to have options. It’s about striking while the iron is hot.

As business owners start to think about succession and transition, what are some of the things that typically surprise them?

Pinchak: The value of the business. There is usually a gap between what they believe the business is worth and what they need to live off of if they sell a business.

McCormack: The risks that a buyer perceives in valuing that business. Business owners sometimes don’t recognize those risks, things like the quality of financial statements or lack of depth of leadership. But some of those risks are manageable. So if a business owner has time to deal with those risks and de-risk the business, the multiple should go up some.

What is the difference between having the business positioned to generate income versus positioning it for value in an acquisition? What’s a decision you’d make differently?

Amy Spangler

Gierasch: It is short-term versus long-term thinking. Most of the time businesses are short-term-focused. They’re looking at how they can build their income. They’re under the misimpression that that’s typically what’s driving acquisitions and acquisition prices. But the value issue has to do with diversification of income streams, the credibility of your operations, the credibility of your accounting, the folks that make up the components of the business. That requires investment and short-term sacrifice.

Are vendors, suppliers, and employees thinking about the succession plan in the backs of their minds?

Pinchak: Your key employees are probably the most valuable, especially on the management team. So if those folks start looking and saying, ‘I don’t know what this person is doing, what their plan is, what their strategy is,’ if they leave, that’s a blow to the business owner’s value. And if there is no communication, there is no plan, that could be very detractive to value.

Dame: Think about it with partners too, because you have partners with unequal timelines. You’re 70 years old. I’m 55. I’m not ready to go, you are. Our goals aren’t aligned and I don’t want to buy you out. So it becomes a very complicated issue.

Gierasch: You’ve definitely waited too long, though, if for everyone around you, including your employees, this is what’s at the forefront of their minds. That adds massive distraction to your business. There comes a time when a business reaches a critical mass, in terms of whether it’s revenue or income of the amount of people, when you cross that threshold of starting to instill some confidence in your employees and those around you that you’re okay to talk about this, that there is a plan, and here is what the plan is. That becomes not just appropriate but should become a requirement if you want your business to be as valuable as it can possibly be.

Are business owners open to talking about planning with their employees and colleagues, their vendors and suppliers?

Amy Spangler

Gierasch: I have several clients who have a very healthy outlook when it comes to the need to plan, the need to document the plan, the need to be transparent with their employees. That’s created the highest-functioning businesses that I deal with: The owner sets the tone for transparency and has inspired confidence in the employee base that they’re planning for these things. But you also have owners who are inclined to keep everything close to the vest. While I think there should be some discipline in how those communications are shared, if you’re not sharing anything, you create uncertainty, and that’s where the distraction comes in.

Brown: They won’t share because they’re afraid of either their competitors or their customers finding out, and they’re afraid their customer is going to say, “ABC company is not going to be here. Maybe I’d better use two vendors.” Or their competitors are saying, “ABC Company is going to be sold and you’re going to get sucked up by some big company.” They’ll put a wedge between the business and the customer.

Dame: Or they think employees will quit because of the unknowns: “Who’s going to own us? What is it going to be like?” People worry about it. They might be worried about you as the owner, but they’re going to be more worried about themselves.

How long does it typically take for a company to become ready to sell?

McCormack: We’ve had some transactions that have taken place in two months, very successful transactions. But others have been planning succession to some degree five, 10, 15, 20 years or more. It really is business- and owner-dependent. But it’s my perspective most are at least one year.

Gierasch: It’s also a matter of what you want to get out of the sale. In some cases you have a business to sell in the next couple of years, but the accounting doesn’t have a tremendous amount of credibility. You can take a year, year and a half, two years to make the finances of the business look better. That’s a shorter-term proposition than trying to drive value. Those things can take five, 10, 15 years.

Brown: And what about transitioning to other family members? The kids in the family may not be ready. First of all, you don’t know if they’re going to do it. And secondly, they may not be qualified to do it. And there is a process with that, too. They’ve got to learn how to run a business.

McCormack: It also takes some time to mentally start making that transition. What are you going to do after? Are you going to be golfing at Elkhead or at the beach all the time?.

Dame: We can’t assume that everybody that sells is going to be 78 years old. I have a lot of 55-year-old people that sold and that means that you’ve got 20 years to get to be 75. And what do you do for 20 years to get to be 75?

Gierasch: We’re missing the therapist and the life coach in this discussion.

Pinchak: The most successful ones have taken the time. They’ve talked with their family about it. There is some communication around how this is all going to work. That doesn’t happen sometimes. There is miscommunication and it doesn’t go as smoothly as they thought.

Dame: I had at least one, probably two CEOs, 55-ish, who believed their kids were going to take over the company. The kids eventually told them, at 27 to 30 years old, “You know, I don’t think I want to have your job.” And so the parent goes, “Holy cow. I’m setting this up for you and now I’m not.” In southcentral Pennsylvania a big issue is the executive, the founder, or principal person being unwilling to bring in other people to help them run the company or handing over the reins. It’s really tough for people to do that.

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