Putting success in succession planning
Every business owner needs a strategy, but very few actually have an exit plan. Transition in business ownership or leadership comes with a natural set of challenges. Far too often there is little planning involved.Many owners wait until retirement age to begin thinking about succession. According to a recent Forbes Magazine article, Baby Boomers are retiring at the rate of approximately 10,000 per day.
Without a clear succession plan, business owners face the possibility of selling their business at a value far less than they could have received. Or, even worse, the company winds down its operation and closes. These results can occur due to common scenarios which consist of profiles containing some, if not more of the following elements:
- A closely held entity with one or two founding owners who have been responsible for growing and maintaining the company’s revenue, including developing/maintaining key customer relationships. Transferring those key relationships to other senior leaders in the company takes time and effort. Transition over time (years, not months) can help the business remains healthy and sustainable.
- Heirs to the owner(s) who are often unqualified and unmotivated. Unanticipated health issues (stroke, heart attack, etc.) can often lead to a spouse or child(ren) having to navigate the operation – or sale - of the business with little or no training or understanding.
A succession plan can make a major difference in maintaining the ongoing operation of the business. While a consultant might help with the valuation and sale, having someone designated to operate the business in the meantime.
Elements necessary to transition a business to new owners:
- Capital to invest in the company (i.e. buy out the current owners)
- Technical expertise
- Ability to generate/maintain customer relationships
- Personnel management skills
- General business acumen, including financial literacy, necessary to accurately assess operational results and financial condition for decision making purposes
Every successful company should develop and maintain a strong leadership/management team that expands well beyond the founding shareholders who created and grew the company.
For a company to achieve its maximum earning potential (and value from an investor’s/buyer’s perspective) it has to possess enterprise value. That means its financial success is not dependent upon a few key stakeholders. That is becoming increasingly difficult due to the leadership gap that grows with every retiring Baby Boomer. A recent white paper by iCIMS highlights some key factors in addition to the retirement rate of Baby Boomers mentioned earlier.
- 32% of U.S. companies report difficulty in filling job openings due to talent shortage.
- 30% of hiring managers say they struggle to find candidates for senior leadership roles.
- Only 15% of organizations say they have a strong bench of leaders.
- Only 23% of companies make succession planning a high priority.
- Only 31% of millennials express interest in a C-level position.
Creating a meaningful succession plan now and acting on it can help you avoid many of the pitfalls and problems noted in this blog. Getting strong, objective, professional insight to help with the planning process can be well worth the engagement.
About Price CPAs
Price CPAs exists to make a positive difference in the financial experience of our clients. We have helped many businesses with succession planning, accounting, tax, assurance and other services from litigation support and forensic accounting to business valuation. You can learn more about us at our website or by reviewing our digital brochure. You can contact us as 615-385-0686 or firstname.lastname@example.org.