Business owners hold the keys to succession planning — if they take action

Business owners hold the keys to succession planning — if they take action
Eric Larson, Beene Garter LLP (to left); Bryan Reeder, Plachta, Murphy & Associates PC (top right); Nick Reister, Smith Haughey Rice & Roegge PC (bottom left); John Porterfield, Comerica Inc. (bottom right)

Some business exits go smoothly; others, not so much.

The key for business owners approaching the time when they’re poised to move on is to plan early and often, and to thoroughly think through their approach to the process.

That’s according to four advisers MiBiz interviewed separately to get their perspectives and advice on succession and transition planning. The advisers were:

  • Eric Larson, a partner at Beene Garter LLP in Grand Rapids
  • Bryan Reeder, attorney and shareholder at Plachta, Murphy & Associates PC
  • Nick Reister, attorney at Smith Haughey Rice & Roegge PC
  • John Porterfield, regional president of Comerica Inc. in Grand Rapids

Here’s what they had to say.

 

What’s the smartest thing business owners can do if they want to position their companies for a sale?

Larson: If they are going to sell to an outside party, really focus in on those things buyers are most interested in. Do those things that minimize risk and enhance the value of the company, which is developing a robust management team that is well diversified and developing a well-diversified customer base. That sounds obvious, but it’s missed a lot of times.

Reeder: Have clean books and records. Have a clean balance sheet to make it easier for the buyer. When they view the books and records and there’s no issues, it’s easy for them to see what the business is worth, what the assets are, what they’re purchasing.

Reister: It goes back to having your house in order. Having legal agreements updated and up to snuff, making sure that employees that are key to the company are locked in and prepared for whatever lies ahead, and then generally making sure that the workforce and staff are likewise not going to be upset during the process. That’s not the same for everybody. It looks differently based on the company and the staff as far as how much information you share and how critical they are to the future of the organization, but attention needs to be given to it.

Porterfield: Before you hire a good investment banker, maybe have a heart to heart with key stakeholders in your business about what’s important to you and to whom you want to sell. Some people are totally averse to selling to private equity. Some people love the idea of selling to private equity. Some people don’t want to ever sell to a competitor. Some would have no problem doing that, or a strategic buyer from out of state. What’s important to you? Early on, you need to decide how you want the business to be perpetuated.

The decision will be easier to make the sooner or the more aggressively you think it through in the beginning to whom you want to sell. You can’t go into it thinking, ‘I don’t know who I want to sell it to. I don’t care.’ Well, you are going to care. So think about it on the front end as much as possible and get some outside help thinking about it.

 

What’s a common mistake you see that business owners must avoid doing?

Larson: Trying to go it alone, or not utilizing a good team. You’ll see a business owner try to cut corners or quarterbacking the process themselves and do things piecemeal. This process works best when the business owner relies on their professional team and really operates them as a team. So then the tax adviser knows what the attorney’s doing and those things are consistent with what the business owner wants and they’re working with potential buyers. When you have a team working together, that’s the way you’re going to maximize the outcome for the seller.

Reeder: Not planning early enough or not planning at all. Planning in an emergency situation such as an unexpected health reason. Or — we have this way too often, especially with single member LLCs — if someone unexpectedly dies and you have nothing put in place. That’s the worst thing because then you’re leaving that to your spouse or to a family member or the kids to sell it on a fire sale and to pick up all of those pieces, and they don’t know a thing about it.

Reister: People tend to be penny wise and pound foolish. They come in fearing the cost of the transition when they should be fearing a bad outcome. Being prepared to do it the right way from the start is really critical, and doing everything by the book and making sure that they have a sophisticated team who are experts in their fields and then relying on those experts to guide them through the process.

Porterfield: I wouldn’t call it a mistake, but I would call it critical. You need to know in your heart who you really want to sell this to, and that requires a good amount of homework to understand. How are they going to perpetuate the business? How are they going to manage the business? And is that going to line up with your values and the history of the company that you’ve built? You shouldn’t go sell a company until you know to whom you want to sell it, or at least the type of entity you want to sell it to.

 

What’s the most misunderstood aspect about the succession and transition planning process?

Larson: (It’s) what’s misunderstood by the professional team, which is focusing in on what the true wants and needs are of the business owner. That’s missed too many times and folks too often go chasing after dollars when that’s not the only thing that matters. Really focusing in on the holistic approach with the business owner and what things matter to them, and when you focus in on that, then you’ll get to the right deal. You’ll have a higher probability of getting the right deal and a party that is most satisfied with the outcome.

Reeder: How much is their business worth? People think that the business is worth X amount of dollars and they put an artificial value on the business because they never had an actual valuation performed. They never had a third party or outside party look at what the business is worth, so they may artificially apply a value themselves and have false expectations they should receive X amount of dollars if they were to sell their business, when in fact it’s only worth what someone is willing to pay for it.

Reister: People think there’s a one-size-fits-all solution. They need to be prepared to be participants in the process, and they need to be prepared for open dialogue. They need to be thoughtful in the process and engaged and be prepared for a fluid process that’s not going to be an overnight event.

Porterfield: Once you relinquish ownership, things will be different. That means if you don’t own it, you don’t have a final say on decisions even if you still are involved under an employment contract or whatever. Things will be different. It can be hard for somebody who started something in their garage and built it into a good-sized business, when they sell it, for them to let go because they have put so much toil, time, effort and sweat into building the business.

 

What are the signs that tell an owner it’s time to begin the planning process toward eventually exiting the business?

Larson: That really varies. For some, there really aren’t any signs. I would say start looking at your peer group. Age is a certain thing, and there really isn’t a common answer. I think it varies from person to person and industry. Probably the biggest thing is that you have started to lose passion for the business and you have kind of this myopic view, or you look at others behind you who maybe are successors to the business and those folks keep passing you by. You develop people and they leave or your other partners are going. You have these people who are waiting to ascend to the leadership or ownership role and they keep leaving because you’re getting in the way of them having those opportunities.

Reeder: It could be wanting to spend more time with family, or something happens to a spouse or your family’s growing. Or you’re spending less time in the office, and you have less desire to build the business and maybe you’re just kind of on autopilot. If you’re involved in other activities and you start to have a desire to do more of those. If you have a calling for other passions you want to pursue and other things you’d like to do, as opposed to spending all your time running the business, that’s a good indication as well.

Reister: When their kids have started or expressed an interest in joining the business, and when there are key employees who are critical to the success of the business. When the owner starts losing interest in the business, such as spending more time away, or expressing fatigue from their involvement. If health issues arise or they are aware of family history of health issues, and when the business starts suffering or employees are leaving.

Porterfield: There are a whole lot of different signs. Circumstances can vary widely. Health might be one. What is your health? Do you have any health considerations that limit how much time and effort you can devote toward a business you’ve successfully built? Secondly, you must be very conscious of the industry or the market in which you operate. If you want the business to perpetuate and be successful, you need to proactively embrace change that is occurring in your industry. Many of us have seen companies that were extremely successful, but maybe as the owner aged, he didn’t embrace change as much as he did in his earlier years. If you don’t embrace change, might your business be left behind and be worth less?