September 12, 2016 Bob Gruhler

A “Tail” of 3 Exit Strategies

Sounds a bit like the three little pigs but illustrates some of the important issues inherent in succession planning.

A vibrant, compelling gentleman started his company out of the back of his pick-up truck and built it into a multi-million dollar affair.  He longed for ‘retirement’ where he could confidently pass his company over to a family member while Dad enjoyed travel, grand kids and a lot of the fun activities he missed while he was working so hard to build his company.

At first the biggest challenge was finding the right successor amongst family and long term employees.  It seems that nobody was just right and bringing in an outsider was out of the question.  Ultimately an unlikely candidate emerged that was perfect for the job.

First we set out to create a new organizational structure to take over/redistribute dad’s crucial functions.  This was a bit tricky as the new culture was to be collaborative and structured which was a departure from the past.

After 3 months of working together and seeing the new culture and flow come into being the successor grew tired and frustrated by a process that he did not understand and the project was cancelled.

Second scenario involves a successor who wants to move into the next phase of his life and turn the business over to his heirs.  After a few rounds of discussions it appeared that everyone was in accord with the choice of successee so we began to move forward.  The financial results of the company where just fine for dad and his life style.  When the company revenue was forecast without dad working there was not adequate net profit to provide sufficient compensation for dad and the successee.

The solution was obvious.  Over the remaining two years the focus of the company would change to take advantage of new innovation and needs in the market.  This would transform the business into a profitable situation that would provide dad’s required income and a challenging and profitable company for the successee.

Victory!?  Nope, seems dad did not think the company should change and we should just work harder.  The result.  Dad’s still at work and the plan is dead.

Third, mom has spent a lifetime building up a lucrative service based business.  Her heir had been working with her for a few years and understands and has successfully run the business, giving mom confidence.

The challenge was moving the business into a more professional location which seemed impossible but within a few weeks everyone was on board.  Contracts signed, business flourishing!

The moral of these stories is that the issues presented in the Exit $trategy page must be addressed and possibly doable before considering succession planning.

  1. Determine the current value of the enterprise in terms of net income and cash flow.
  2. How much is available for the owner to utilize in retirement and for the new person to receive in compensation and incentive.
  3. Frequently the current amount is not adequate for both parties but with analysis and planning, a course of action, including timelines, initiatives, and skills required, can be developed and considered.
  4. Is the WIFM (What’s in it for me) adequate for both?
  5. Is the current owner willing and capable to ‘endure’ the process of evaluating their past practices and altering all or many to ‘update’ the business to achieve success now and in the future?
  6. Is the apparent heir capable or able to learn the skills necessary to further the business?