How to Survive Ownership Succession

By William M. Dillard

Statistics indicate that 70% of privately held businesses will change hands during the next 10 years. Many baby-boomer entrepreneurs who started their businesses in the late 1960s and '70s are close to retirement.

Having been there and done that, I thought I would share my experience, along with those of some of my clients. For example:

• What steps you should take to develop the maximum value for your years of
  investment
• The impact of ownership transition on you the entrepreneur, your associates, the acquiring organization.
• After the deal is done, what's next?
• How, what, and when to communicate to your associates.
• How to get back to work post-transaction.

The Big Decision

The decision to sell, merge, liquidate, or transfer your business is always a tough, emotional roller coaster. You'll likely change your mind several times before making the final decision. In fact, I've seen situations where the decision was reversed at the last possible minute during the closing.

Most of us who invest our heart, soul, and most of our assets in starting a business never give our exit strategy a single thought until it's too late.

Don't procrastinate on this decision. The most successful transitions are those that are planned and integrated into the goals and objectives of a strategic business plan.

Making The Deal

Once you’ve made the decision to transfer ownership, it’s time to focus on getting a deal done. (For the purposes of this article, let's strictly focus on sale or merger. Liquidation or transfer of ownership to a family member or members is a completely different set of strategies.)

In the case of a sale or merger decision, it’s important for an owner to have the proper perspective. Remember: Your goal should be to complete a transaction that’s a win-win for both parties. In addition, structure the transaction to allow you to make the best possible decisions.

From my experience, I strongly recommend engaging a third party to represent you during all negotiations. Doing so allows you to separate yourself and your emotions from the intricacies of the transaction.

For example, I was able to concentrate on running my business and keeping our organization on track while my representative concentrated on making the best possible deal. Yes, you pay a fee for such representation, and it varies depending on who represents you.

I also recommend finding a representative who only gets paid if a transaction is completed. Having a representative who has skin in the game is crucial. Stay away from those demanding front end fees, or fees for developing marketing packages.

If a certified business valuation is required in your case, insist on interviewing firms providing such services. Investigate the extent of their experience in your industry. How many valuations have they performed specific to your industry? Have their valuations ever been challenged?

Expect to pay for this service. A certified valuation can generally run between $15,000 to $50,000, depending on the size and complexity of your business.

Due Diligence

Once you’ve received a letter of intent, you enter the due diligence phase of your transaction. It’s important to be prepared for this phase of the transaction because you must produce a great deal of information about your organization. Be prepared and have your books in order.

If you use outside accounting services, make sure your accountant is prepared to provide the additional services required to complete a transaction, and that your historical records are available.

You may also need tax advice. Know the impact of a sale or merger on your personal and corporate tax positions. The due diligence process could become a full-time job for one or more persons, depending on the complexity of your deal.

In addition to accounting issues, your strategic plan should be up to date.

Be prepared to discuss in detail where you are with respect to organizational goals and objectives.

I recommend assembling a transaction binder that includes all correspondence and information generated as part of the transaction. Remember: Due diligence goes both ways. Don't hesitate to ask the purchasing party for a list of items important to you. If you get resistance to such requests, consider it a red flag, and ask more questions.

Communication — Pre-Transition

During the ownership transition, it‘s always a challenge to say the right thing at the right time. This is why open communication provides the best forum for maintaining your key associates, accounts, and momentum.

Your associates always know more than you think, and suppressing or controlling the information flow concerning a transaction can be distracting and destructive.

Likely, your associates are unsettled by change. They may not be stockholders in your organization, but they’re certainly stakeholders.

I recommend talking about the transition openly and frequently. In this way, you’ll get concerns out onto the table. You’ll also find out who supports you, who is skeptical, and who doesn't support you.

Planning A Transition

There’s much to consider when planning and implementing a transition. For example, is there an integration team? Who should be involved from the acquired organization? What is the acquiring firm's strategic plan? How does this acquisition fit into that organization’s strategy?

Successful strategic planning shows what the business will look like in five to 10 years. It also has a clear mission that identifies the customers it serves, the products or services it provides, and how it differentiates from the competition.

A good strategic plan should include five to seven major goals that the business will focus on during the next five to 10 years to achieve its vision. It should also include objectives and action plans that are incremental steps to achieving those goals.

As a result, the strategic plan is a road map for both the purchasing and acquired organization because it provides the necessary direction needed to implement a successful integration.

Communication — Post-Transition

Just as during the pre-transition stage, open communication is essential during post-transition. Having a clear plan as described above answers the "what about me questions" that always come when integrating two organizations.

Nevertheless, regardless of how much or how well you communicate, there’s almost always a period of distraction resulting in productivity loss.

Therefore, the more focus there is on the strategic plan, the less impact these productivity losses have on the new organization. Good planning and good implementation help stakeholders
focus on the future.

Discuss issues of major concern to stakeholders such as job position, benefits, and new responsibilities. Remember that good communication flows right through to the customer. If your stakeholders "get it," they will be the best source of information for your customers.

The Owners' Emotions

As someone who has created a thriving organization out of a vision, I can tell you that selling or transferring a business can be a very emotional event in one's life. The best advice I can give in dealing with such emotion is to focus, once again, on your personal plan for your future.

Create a vision of what you want to be doing in three to five years. Those around you who will be part of that vision should be involved in the decision process.

Once you have that vision firmly in place, share it with those who matter most and start planning for the future. Being focused on your future takes your mind off the emotional impact that often accompanies ownership transition.

Remember, too, that those closest to you will also be going through an emotional period. My wife often reminds me that I'm not the only one involved in our transition.

Therefore, don't procrastinate. Start planning your exit strategy now. Plan and implement strategically to get the most value for your business. Separate yourself from the negotiations if possible. Communicate openly with your associates. Remember they are stakeholders in your organization and deserve to be treated fairly in the process. Be sure that you understand and support the strategic plan of the acquiring organization.

And finally, plan for your future after ownership and enjoy your next career or retirement, whichever it may be.

William M. Dillard is president of Business Strategy First and Mechanical Services of Central Florida. Business Strategy First specializes in strategic and succession planning for small- to middle-market, privately held service businesses ranging from $5 million to $250 million in annual revenues. A 30-year Florida contracting veteran, he is a licensed facilitator for the Chart Your Own Course® Strategic Planning process. He can be reached at 407/804-1932.