The Secret to SUCCESSION –
X + Y + Z = 100%
Experts say one of the biggest crises facing businesses is the imminent succession wave, as thousands of baby-boomer entrepreneurs prepare to retire and pass their companies on to other people.
The risk is real! The average life span of a family-owned business is 24 years (familybusinesscenter.com, 2010). About 40% of family-owned businesses turn into second-generation businesses, approximately 13% are passed down successfully to a third generation, and 3% to a fourth or beyond (Businessweek.com, 2010).
What are the Secrets of a Successful Transition?
Note: These tips are based on the successful transition of Gelderman Landscape Services (2nd to 3rd Generation). Here is the winning formula:
X + Y + Z = 100% Success
X – represents the “Seller”
Y – represents the “Buyer”
Z – represents the “Company”
All 3 parties are vital to a successful transition! As the Company will be the party “funding” the transaction!
X – “THE SELLER”
1. THE SELLER NEEDS to PREPARE themselves & the COMPANY – “POLISH THE APPLE”:
- The Apple is your Company! Continue to develop your company that is polished and “Saleable”. A company that someone wants!
- Ensure the company is profitable and growing
- Re-invest in Capital until the last day – Company must be “Top Notch”
- Ensure financials are “clean” – no cash “Due to Shareholders”
- Ensure that the company is not reliant on you, the SELLER. Continue to build systems and processes.
- Once the decision is made to “sell/transfer/pass on”, then Be 100% committed to the process
- Pick a date – draw a line in the sand
- Speak to your CPA/CA & lawyer
- Understand the the process will take longer than expected
2. THE SELLER needs to set the PRICE & TERMS
- Price it Right – Use experts in your field for assistance
- Not too high
- Not too low
- Will full payment be due upon closing?
- What will the Interest rate be if you are holding the mortgage?
- Will you hold the mortgage? Vendor take back?
- What will be the Length of Term?
- Consider offering a “Mulligan” (ask me what this means here)
3. WHAT’S NEXT for THE SELLER?
- It is important for the SELLER to have hobbies and plans for what will happen after the transition
- What will your “new life” look like?
- What hobbies do you have?
- Where will Volunteerism?
- Do you plan on moving
- Or will you get in the way?
As the SELLER, you need to have something to do after you sell your business
4. STEPPING DOWN – a BOLD MOVE
- Is the Seller committed in stepping down was the sale occurs? Are you 100% committed?
- This is probably the most difficult move for a SELLER. They have worked hard for many years and can be fearful of what happens to their “Apple”
1. Who can take over the company? Who are the POTENTIAL BUYERS:
- Employees – Employee Share Ownership Program
- Competitor
- Private Equity
- Family Member(s)
2. Every Buyer needs to consider the following:
- The buyer needs to have “skin” in the game. The buyer needs to feel the “heat” or “fire” of the purchase!
- Gifting or under valuing the business for a family member is NOT recommended
- Stress and pressure is good
- Respect the past, but move forward
- Grit and tenacity are required
Y – The COMPANY
1. TRANSITIONING OF ROLES
- For family members/employees
- Get clarity and accountability – create success profiles for each position.
- The new Buyer needs to understand all aspects of the business
- The new Buyer must “Command Respect”, not demand respect from everyone!
2. NEW PATH FORWARD
- Don’t fall into this trap – of saying “it’s the way we have always done it”! I believe that there is nothing sacred in the business! Respect the Past, BUT move on!
- Don’t mistakenly adopt the prior generation’s strategy and way of running the business!
- Complete a SWOT and your own Strategic Plan for the company
- Be clear on your Core Values, your “Why”, your BHAG, your Goals and what is required to hit your goals
Communicate the future direction of the company, continuously!
3. POTENTIAL RISKS
- In every transition there are the potential risks. Prepare for the worst.
- Loss of key supplier(s) – some may not want to sell to you
- Loss of key customer(s) – some miss the Seller and don’t have a relationship with you (the Buyer)
- Loss of employees – some don’t like the new direction that the company is going
- Banks and Lenders – they are worried that the company will not be successful (as the stats are not in favour for the Buyer)
4. PROFITABILITY DRIVEN
- The Company must come 1st! It’s tempting as the new Buyer to take cash out of the company, but you cannot until the Financial Transaction has been completed
- Remember that growth takes cash, and cash is King!
CONCLUSION:
Fast forward to 2022, over the past 15 years I have been tremendously blessed! The transition from the 2nd generation (Hank Gelderman – my father-in-law) to the 3rd generation (my wife and I) has been very successful and the Company (Gelderman Landscape Services) continues to thrive. For a more comprehensive explanation, please view the presentation that I completed for Landscape Ontario here.
If you are thinking of selling your business and would like help with your Succession Plan, contact Southbrook Consulting.
