The Succession Conundrum PART 2 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 This is the second part in a two-part series on succession by Jenifer Bartman; the first part appeared in the Q2 2014 edition of Private Capital.
f succession planning is a challenge for business leaders, potential successors might describe the process as mysterious. While a business leader or founder has typically been at the helm of a company for some time, potential successors are often just trying to find a way to get to the table. One day, the founder is keen to step back from the company, while the next day retirement seems far in the future. For someone wanting a leadership (and ownership) role, this type of situation can be a difficult to deal with on an ongoing basis. Whether a potential successor is a longstanding “2-IC” (second-in-command), management team group or family member, their vantage point might provide relatively little information in terms of how the company actually operates, the business leader’s true expectations around succession and what it would actually take for a transaction to occur. Add in the mixed messages that can be so common with the issue of succession and it might be enough to cause a potential successor to scramble for the door, vowing to create an opportunity all their own (and on their own terms). This reality should be sufficient to get the attention of business leaders who are contemplating succession, if not outright relying on it as a means to monetize their ownership position. Given that a recent survey conducted by the Canadian Federation of Independent Business1 found that the top barrier to succession planning is finding a buyer/suitable successor (56 per cent), those seeking to exit their business should recognize that finding (and keeping) a potential successor is not to be taken lightly. Unfortunately, too many potential successors find just the opposite to be the case.
The successor perspective Something that many potential successors have in common is that they are keen to implement their ideas, take 32
Private Capital § Quarter 3 § 2014
the company in a new direction and just “get started.” Many have a reasonable expectation that succession will occur at some point in time, either by virtue of previous conversations on the topic, or perhaps, in the case of a family business, where succession is “expected.” Call it an informal succession plan. As a result, potential successors want to better understand how and when a transaction might occur. This is particularly true in the case of individuals who have invested a number of years working in a company, learning how it operates and directly contributing to building its wealth. They reach a certain age or point in their careers when they truly need to know: (i) if a succession opportunity actually exists; (ii) when it would occur; and (iii) what the financial implications would be, particularly in terms of the cost to undertake the transaction. In the absence of this information, a successor’s next best alternative is to move on to other opportunities, and given the effort they have invested in building the company (often, to the direct benefit of a shareholder group in which they are not included), this is understandable.
The opportunity Identifying a qualified and willing successor is only the beginning of the succession process, as there is often still plenty of learning to do in order to fully assume and conduct the leadership role. But even before this can happen, the parties need to be able to arrive at an agreeable value and the successor has to have the ability to pay, either by way of their own funds or through securing financing (in the absence of either of these options, it often comes down to the departing business leader to agree to be paid over time). Since the Canadian Federation of Independent Business survey found that valuing the business (54 per cent) and securing financing