Strategic, Succession, Transition and Exit Planning.
Why should I care?
Some say that “Failing to Plan is Planning to Fail.” Not true! Many businesses never plan, but they survive through the individual strength of their owner. Even if they never really thrive, they still survive. The owner knows where they want to go (the vision thing) and tells the employees what to do (the action part). Even if the results are mediocre, the business can still survive. Others feel that planning is a waste of time since the only thing you can say for sure about the resulting written plan is, “That’s exactly what we will NOT look like in five years!” True, but irrelevant. Both are correct and both are wrong, but for different reasons. Let me decipher.
Vision drives Values which guide Actions which produce Results, (good or bad)
If we accept this strategic planning mantra, then it’s clear that value comes from the planning process and not the written plan. It’s the discussion among the leadership of their collective Vision and the identification of shared Values which makes clear which Actions should be selected to achieve the desired Results. It’s about making choices and empowering employees. The Actions (strategies) provide for the accountability of the Results.
However, if the written Plan becomes sacrosanct and creates inflexibility it’s unfortunate, since the written plan is not as important as the planning process. The written Plan is typically just a “final report” on the planning process, so the work can be shared with others. Therefore to maximize the benefits of planning it needs to be a periodic assessment of the business and where the leadership wants to take it instead of a one-time event, just so we can say we did it.
Since strategic planning is forward thinking, how does Succession planning, Transition planning, or Exit planning fit into all this? For the privately-held company, how can the owner’s personal lifetime desires and goals get factored in? If strategic planning is a collaborative process involving key employees looking outward to the company’s future, then exit planning is the singular process of the owner(s) looking inward toward their personal future. Clearly unforeseen events (or opportunities) might cause the exit plan to become obsolete. Therefore, some bottom line thinkers might see exit planning as just a waste of time and money. Maybe it is. But, here again it’s the discussion of the options and opportunities that generates the value in exit planning; not the preparation of a written plan.
In a recent article by Mark Wardell (Wardell Professional Development, Inc.) he astutely identified four stages of business development that causes a corresponding leap in the value of the business. If the owner’s objective is maximizing the value of the business at the time of their exit, then effective planning is likely the most productive way to achieve that goal. Below are the four levels for you to assess where your business is today. As a business moves from one level to the next, risk is reduced and value increases significantly to a prospective buyer. However, it’s only through effective planning and employee empowerment that a business can progress much beyond Level One.
Level One: An Owner Driven Business. The owner makes it all happen. Because this level of business is highly reliant upon its owner, the risk of the business losing its profitability following a change in ownership is at its highest. (This is why small businesses like this typically sell for only 2-3X earnings)
Level Two: A People Driven Business. Key people other than the owner make the business happen. At this level, succession related failure is reduced, but it still plays a role due to the fact that key people may leave and take valuable information and even customers with them.
Level Three: A Process Driven Business. The business is run by systems which greatly reduce the risk of failure after a change in ownership. At this level, systems are in place to ensure that operations continue according to the Plan, with or without the owner or key employees so the business is set up fairly well to run itself. It’s obvious why this business has greater value.
Level Four: A Culture Driven Business: In this environment, the culture (driven both by systems and key people) makes the business happen. The culture indoctrinates new hires into an environment of continuous improvement, based upon management and information systems already in place. (These are businesses that sell for 6-12X earnings since the risk is lower.)
Once you identify which level best describes your business, the next step is to ask yourself, “Am I willing/able to give up more of my personal control?” Many entrepreneurs are unwilling or unable to give up their tight control for which they believe in their heart is what got them through the risky Level One. But, they can’t get to Level Two since the message in their head is, “No one can run this business as effectively as me.” This mental message is typically delusional. It was derived by emotional thinking so it can’t be changed by rational discussion.
“Micro-managing, Benign Dictator” or “Autocrat” are terms which the employees of many Level One & Two companies use to describe their owners, even when they love them as people. If the owner cannot change, the business probably has just outgrown them. For the sake of the future of the business, a sale may be the best action. Even though value for the business has not been maximized, it may already have been maximized for that owner.
In fact, it’s frequently businesses operating somewhere between Level Two & Three that are most attractive to private equity groups. The PEG’s objective is to purchase the business at a lower price and guide the former owner in further reducing their personal control and establishing systems while seeking through the planning process to develop the business into a Level Four: Culture Driven Business. When the PEG is successful, (even if they must replace the previous owner) they are able to later sell the business for a greater multiple of EBITDA. Likewise, the amount of EBITDA of a Level Four business is also typically much higher. The PEG mantra for investment success; higher earnings and higher multiples.
Len Russek, a former CPA has been a Mergers & Acquisitions advisor for over 25 years both inside large corporations and as an intermediary during which he has been involved in structuring and negotiating the sale of hundreds of businesses. Contact him at 727-894-7888 or LRussek@TransworldMA.com – www.TransworldMA.com