The Succession Conundrum PART 1 OF 2
Business leaders, the weak link to successors, and the companies who try to finance them By Jenifer Bartman, Jenifer Bartman Business Advisory Services
usiness succession planning is tricky – part old, part new, part money, part emotion – it’s no wonder that so many business leaders put it off. The reality is that an abundance of Canada’s small to medium- sized businesses (more than half, according to a survey conducted by the Canadian Federation of Independent Business) don’t have a succession plan at all. Since companies in this category are responsible for generating approximately one half of the Canadian economy, there is undoubtedly cause for concern. Consider some of the key survey findings1: ›› 51 per cent of business leaders surveyed indicated that they don’t have a business succession plan. Of the 49 per cent that have a plan, only nine per cent have a formal, written plan. ›› Approximately 48 per cent of business leaders plan to exit their company within the next five years. ›› 48 per cent plan to exit their business by selling to buyers unrelated to their family, while approximately 37 per cent plan to sell or transfer the business to family members. ›› The top barriers to succession planning include finding a buyer/suitable successor (56 per cent), valuing the business (54 per cent) and securing financing for the successor (48 per cent). Those who have even a moderate interest in the issue of business succession likely realize that various surveys and sources of information have yielded similar results. Delving beneath the surface, however, reveals interesting implications for business leaders, their potential successors and those who seek to finance the transition, some of which should be sufficient to kick-start those seeking an exit anytime soon into action.
The business leader perspective Since over 85 per cent of business leaders surveyed identified retirement as their reason for exit, it stands to reason that many have invested a considerable amount of time and effort into building their company. As a result, a transfer of ownership represents the primary opportunity to monetize value that has appreciated over what 32
Private Capital § Quarter 2 § 2014
could be a lengthy period of time. Although this increase might be significant as compared to that of inception, business leaders are often dissatisfied with the offers they receive, which reinforces the need for thorough, early and practical succession planning to maximize value wherever possible. What’s even more compelling is how dependent a business leader’s ability to cash out at what they consider to be an acceptable value actually is upon the ability to identify a potential successor who has the: (i) skills to lead the business; (ii) interest in doing so; and (iii) ability to secure financing. This is a tall order, since many successor candidates might only meet one or two of these requirements. Couple this with a lack of experience in terms of developing a business plan to take a company forward in a manner that provides the necessary level of comfort to secure enough financing to close the deal. In the absence of third party financing, business leaders are left with the gamble of whether or not the company, under new leadership, will be able to generate a sufficient amount of cash over time to pay what could be a significant portion of the proceeds related to the transfer of ownership, a scenario that doesn’t end well far too often.
The opportunity Business leaders and those in the financing field both have a vested interest in terms of how Canada’s succession planning future plays out; the former wants to cash out and the latter wants to roll cash back in. In order to avoid a time-consuming stalemate in a situation where time is of the essence, an opportunity exists to help potential successors become real successors by providing the tools to take companies forward; the right skills, plan and leadership ability (and a bit of extra effort to help get the deal past the goal line wouldn’t hurt!). Here’s how: ›› Business leader skills. Many potential successors have played a second tier role in their careers, without having had the opportunity to ascend to the CEO level. Since the top job can be quite different from what has been the experience thus far, potential successors