The Seven Deadly Sins of Business Sellers

In the first of two CPD articles, experienced Succession Plus Partner – Mergers & Acquisitions, Andrew Cassin, offers seven observations for all small-to-medium business owners and entrepreneurs, and the firm’s Founder, Craig West, highlights a key element in the business succession planning process…

 

I was reminded recently by a now former client of how little most business owners know about selling a privately-owned concern, how unrealistic their expectations are, and how loath they are to recalibrate their expectations based on market feedback.

Without going into too much detail, this particular entrepreneur had a very small team, no systems, was the face of the business and lacked transparency. Sale price expectations were at least double what the market was prepared to pay, and an earn-out was out of the question in their view, despite the obvious necessity for one.

Reflecting upon this particularly unsatisfying engagement, it did not take long to compile the Seven Deadly Sins of Business Sellers:

1. Principal-dependence
Any small business owner should be able to demonstrate to an external party that the effects on performance of a change in ownership would be negligible. If this is not readily apparent, not only is a buyer likely to discount their pricing accordingly, but a longer-term transition period will be required

2. Lack of price realism
“My neighbour down the street sold his company for 20 times EBIT, and my business is better than his, so I think my business is worth the same”, is not an effective business valuation approach.  Relying exclusively on a trusted accountant’s valuation is also not a good idea. The only true measure of value an entrepreneur should put their faith in is what the market would offer. Any more than that is a pipe dream.

3. Lack of growth
Most business acquirers are looking to achieve a better return on their investment than could be achieved in other asset classes. They are typically looking for how to extract greater value out of a business than its current owner can (or has) and to achieve exponential returns. Businesses that cannot adequately demonstrate where future growth will come from will struggle to find a buyer.

4. Poor timing
One should never try to pick the top of the market, but trying to achieve a premium sale price in challenging economic conditions is a tough ask. Better to ride it out and wait for the upturn. However, if there is more urgency around the sale, be prepared to discount accordingly.

5. Inappropriate advisers
One past client engaged a litigator to represent them in contract negotiations – not a good move.  Apart from the inherent antagonism in approach, this particular advisor had little if any experience in the sale of businesses, so the vendor (and the rest of the team) spent as much time and money on receiving advice as was spent on educating the lawyer in question. Surround yourself with experienced, competent and outcome-focused advisors, or risk seeing deal after deal disintegrate.

6. Lack of transparency
Don’t kid yourself – if you are planning to sell your business, at some point in the process before deal completion every skeleton and red flag in your business will be unveiled (either voluntarily or otherwise). Business owners who attempt to shield negative aspects in the hope that they won’t see the light of day are potentially guilty not only of misleading and deceptive conduct, but stand to spend significantly more on professional fees than they really need to.

7. Impatience
The timeframe for selling a business is roughly as long as a piece of string.  Despite best efforts of all involved, the sale process can drag on. It is particularly difficult to achieve a suitable outcome if you are obstinately pursuing a deadline, but if you are, then be aware that sacrifices may have to be made in other areas.  As the old saying goes, you can’t eat your cake and have it too!

When planning for your own exit, consider the Seven Deadly Sins and the extent to which are you engaging in any or all of them.  A great way to build business value and ensure a satisfactory exit is to avoid these behaviours completely, and in fact to do the polar opposite!

Andrew Cassin is a Partner – Mergers & Acquisitions at Succession Plus, has a Bachelor of Business, and tarted his consulting career in 1993. Since 2003 he has been retained as a consultant by dozens of business principals, completed business sales, capital raisings, and facilitated mergers & acquisitions for SME clients. He is the author of On Your Terms: 101 Ways to Prepare a Business for Sale or Succession.

 

Management Succession – The Forgotten Aspect of Succession Planning

This article from Succession Plus Founder, Craig West, highlights a key element in the business succession planning process which can often be overlooked. While the focus for many business sellers is on ownership succession, Craig reminds business owners of the other key element in the process – management succession…

 

There are two types of business succession. Ownership succession refers to the selling down of equity or ownership within a business either internally to family members, or employees, or externally through a trade sale or private equity for example.

Management succession refers to handing over control or management of the business both at a day-to-day operational level and in terms of senior executive management board directorships etc.

What is Management succession?
Management succession is often ignored – it is seen to be easy, simple, and often just relies on promoting people within the business to more senior roles.
Management succession should actually be a process taken over an extended period of time that involves several key stages:

1. Designing a time frame and project plan

  • At what point do you wish to relinquish control?
  • At what point do you wish to hand over board control?
  • At what point will those within the business be ready to manage it day-to-day?
  • What preparation needs to be done to ensure your successes are ready, trained, experienced and qualified to undertake the role?
  • How would you manage the internal and external communication about who is taking over which roles and why?

2. Identifying internal and external skills required (gap analysis)

3. Training, skills, experience and qualifications program for successors

4. Communication – internal and external (using a succession org chart – now, 1 yr, 2 yrs and 5 yrs to map and communicate changes)

5. Project timeline – with key milestones and time targets, including critical success criteria

6. A succession agreement

Why is management succession always left until too late?

In most cases management succession is underestimated. Most business owners believe that management succession can be completed relatively quickly and fairly simply – and neither is correct.

In the best examples of management succession done well, this is a process for somewhere between two and four years. In an ideal world, we need to start way before the owners intend to exit or hand over control.

Many business owners are concerned about confidentiality and don’t want their staff to think they are leaving – the reality is staff already know you are leaving – they just don’t know when or how or what their role will look like going forward. Providing clarity and a certain pathway to management succession will ease a lot of stress.

Many business owners are “control freaks” and do not believe that staff are capable of running the business without them. This is only true if they are not prepared, trained and qualified over an extended period of time leading up to the handover.

What should be included in a Management Succession Plan?

Firstly, a skills assessment matrix to determine any gaps, training needs and experiences which need to be factored into the plan to better prepare staff for future roles

In addition, an organisation chart should be drawn up mapping the current position, and the position in 12 months, 24 months and five years. This will allow identification of gaps where we may need to recruit externally to fill positions or focus on upskilling existing employees.

The plan should also include a strategy including key milestones and timelines for the founders/owners to step back from various roles within the business gradually. Finally, any management succession plan should include success criteria and “deal-breaker” criteria such as: ‘When do we realise it is not going to work?’ and ‘What is our plan B?’

What’s the process of creating a Management Succession Plan?

The starting point for creating a management succession plan should always be communication with your management team and wider employee base.
Management succession often comes with a lot of fear and stress – much of it misplaced due to lack of communication which means employees make up the story from a place of uncertainty. Much of this can be reduced through clear communication.

An education program like ownership mindset to explain how the management functions within the business work and what the key roles need to be is one important aspect as well as an honest conversation about the owners’ intentions, timelines, and expectations.

Key deliverables should then be a skills matrix, identifying any gaps, a training and development plan, a project timeline and an agreement document (not necessarily legally binding) that is shared amongst all involved outlining the intentions and timing.

Why is a management succession Plan important?

In a lot of recent studies around employee retention and engagement, the issue of management succession (i.e. an employee understanding their career pathway, development and opportunity) is a very important aspect of attracting and retaining key employees. At the same time if management succession within the business is not handled well, not only could we lose employees we are likely to see the value of the business decrease.

One of the substantial issues and risks for SMEs is owner dependency – reliance of the owner/s for management, sales, decision making and responsibility within the business. A management succession plan should identify and mitigate this risk by reducing reliance on key people (including founders).

How does a Management Succession Plan fit into an overall Succession Plan?

A succession plan needs to cover both management and ownership succession.

If we only address ownership succession issues, then the business will struggle to operate and continue without the owner. This also makes it very unattractive to an external buyer. Ideally, both plans should be implemented and communicated to ensure the smoothest possible transition of ownership and handover of control and management.

Both plans should be coordinated in terms of timing and overall exit strategy to ensure the best possible outcomes for all stakeholders.
What are some good examples of Management Succession?

There are several high profile cases on family business succession – some done very well (Pratt) – some not so great (Rinehart).

We have several clients who have managed this well – both family businesses handing over to the next generation (or in one case skipping a generation and handing over to grandchildren) and also privately owned professional services firms who have used employee ownership to manage both ownership and management succession at the same time.

In all cases, three things stand out:

  1. Time: good strategy takes time
  2. Communication: early, open and honest and ongoing
  3. Gradual: handover of roles, responsibilities over an extended period produces better outcomes

Craig West is a strategic accountant who has more than 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following six years of study to gain two masters degrees, Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies.

 

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