“The State of Succession Planning”
As I wrote in my previous blog post, I recently invited John Brown, the leading North American authority on succession planning, to Lancaster. I sat down with him to get his personal insights on succession planning following his presentations with business owners and professional advisors.
To begin with, he stated that two major problems facing business owners wanting to retire are the “value gap” and “emotional preparedness” for exiting their business. The value gap refers to the gap between the business owner’s total financial assets (including the value of the business) and the total capital he or she needs in order to maintain their lifestyle for the remainder of their lives. This gap must be confronted squarely at the beginning of the planning process – either by increasing the value of the business or working longer. Brown indicated that helping business owners develop strategies to increase business value will be one of his primary future concerns. Also, helping business owners prepare for life after business is an area Brown wants to focus on. Brown intends to develop these themes in a new book.
In regard to increasing business value, Brown and I reviewed CoreValue® software, a web-based tool which allows business owners and their advisors to assess a business’ strengths and weaknesses and develop a plan to increase business value. One unique feature of this product is that it doesn’t depend primarily on quantitative metrics, but requires the business owner to answer 140 questions about 18 key business areas such as sales & marketing, operations, management team, brand, product differentiation and innovation. Based on an analysis of the answers to these questions and the company’s EBITDA, CoreValue® produces detailed reports showing an estimate of the business value, and more importantly, an analysis of those areas that have the greatest potential for increasing business value. This type of analysis is not just for owners who want to sell their businesses but for all owners who want to create a stronger business. Greater business strength results in higher value, more successful business operations, and increased longevity for closely held businesses. This will result in greater opportunity for an exiting business owner regardless the path he or she wants to follow.
“Emotional preparedness” requires a similarly frank assessment of the owner’s post-business plans. Brown recently was a speaker at Bob Buford’s “Halftime Institute” in Dallas Texas. “Halftime” is an organization that helps successful business owners create “significance” to the second half, post-business portion of their lives. Although Halftime is an explicitly Christian-themed approach, Brown thinks that similar programs can help business owners plan their post-business lives regardless of their religious orientation. Brown thinks that business owners are reluctant to engage in exit planning because they don’t have any clear post-business plans.
Another area for discussion was the succession problems facing family businesses. In recent years there has been a proliferation of family business consultants and organizations. However, many of these specialists will discourage sales of these businesses to non-family members even if it is the best solution for the family. Brown recalled an instance when he was invited to speak to a family business organization in Tennessee. After some discussion with the director about topics for the presentation, Brown offered the opinion that some family businesses should not continue as such because there is no one in the next generation interested in and capable of running the business. The director explained that Brown could not broach any suggestion that in some circumstances it is better for the family to have the business sold to non-family members. Much of John Brown’s and my work involve family businesses and facilitating family business successions. However, since we are not exclusively family business consultants, we do and will consider non-family succession paths when appropriate.
Please contact me for additional information about John Brown, BEI, CoreValue®, or exit planning.