It’s Never Too Early to Start Succession Planning

YOUNGSTOWN, Ohio – It’s never too early to start planning for the next generation of leadership to take over a company. It should be at least three years before an owner plans to exit, most agree, but the sooner work begins, the smoother the transition typically is.

“Regardless of where you’re at in your business lifecycle, there are unexpected things that happen,” says Ted Schmidt, Mahoning Valley regional president for PNC. “People get sick. People can be injured. The key is making sure you’re protecting your family and your business continuity.”

When it comes to helping clients plan their exit strategy, Schmidt says the first question usually asked is who will take over. It could be a family member or a longtime employee. Maybe a sale to another company is in the cards. Making that decision often informs the next steps that have to be taken.

If the management team of a company is in its late 50s or 60s, then time should be taken to develop the following generation for leadership, offers Daniel Rossi, as an example. The founder and president of Business Equity Advisors, Youngstown, explains that transitioning to a leadership team that itself is close to retirement can introduce more problems. 

Rossi’s firm helps businesses prepare for succession by creating an operations manual. The process begins with fact-finding.

“It’s a process of gathering the business’ life history, more than just the data. It’s all kinds of nuts and bolts,” Rossi says. “If a company has an assembly line and runs their machines continuously, even if it’s only one shift a day, is proper maintenance going on? They may have machines that are wearing out … and may produce sloppy parts over time. We’ve seen those who’ve dropped 50% in revenue over that very thing.”

Once that process is complete, the manual breaks down the company’s departments, key employee groups, positions, action plans, financial-management systems and more. 

“There should always be some sort of living, breathing document about the most important parts of your business,” says Tim Petrey, managing member of HD Davis CPAs, Liberty. “Once you get to the point where you’re thinking about retiring or stepping away, your business is always going to be more valuable if there’s documentation of how to do things.”

But that doesn’t mean the company should be tied to the retiring owner’s way of doing things. Given that there’s enough time for the outgoing leader to begin training his successor, there can be a period of side-by-side work. As leadership at HD Davis transferred to Petrey from founder Harold Davis, the two worked together, Petrey says.

“The difference between the successful succession plans and unsuccessful ones is in skipping the mistakes. I was able to skip how many years and how many dollars by having that,” he continues. “The succession plans that tend to not work are the ones where the older generations say, ‘You can’t do it that way. You have to do it the way I did.’ You have to be open and receptive to change.”

Even if an owner has an idea for who will take his place, Harrington Hoppe & Mitchell partner Shawna L’Italien suggests “an unbiased review” of employees through a questionnaire.

“[It has] things like a skills assessment to make a realistic determination of if they can run the business,” she says. “You want them to succeed not just because they’re your successor, but because they may also be the source of your retirement [funds].”

The succession planning process also delves into the financial transfer of the business. At PNC, Schmidt says the bank has a team of advisers to help owners through the process. 

“The money is going to go to many places. It’s going to go to the IRS. It’s going to a strategic buyer or it’ll stay within the family. Some people want to be philanthropic,” he says. “With strategic planning, you want the most money to go to your No. 1 choice.”

Toward the top of the list of discussion points with newcomers to the process is how they want to spend their retirement years and ensuring that it lines up with the cash flow at the company.

“You come up with a best-case scenario and go through the analysis of if the company can afford to pay that back,” he says. “The last thing you want to do is put financial strain on the business because of the number you wanted to retire on.”

If there is no such leader inside the company, advisers can direct an owner’s attention outside the company for either a strategic buyer or financial buyer. A strategic buyer would be a company that has some overlap – sectors, operations, clients, etc. – with the business being purchased, while a financial buyer would be someone looking to take over without such synergies. Either way, Schmidt says, an external transition can be difficult.

“They can have a different mindset of how that company’s culture and longevity carries on to the new owner. Start with family first and then explore other options that make sense,” he says. “The hardest thing for our clients has been to sell the business outside the family. They have an emotional connection and they’re concerned about the future of their employees.”

Outside deals, Rossi notes, tend to be cash exchanges, while internal transfers get into financing arrangements.

“The outsider just has to put up the money. For an insider, it’s complex,” he says. “On an insider sale, the people picked to buy it rarely have the money. So the business has to come up with a plan for those folks to buy it.”

Succession planning is a team effort, beyond those at the company who will one day run it and the financial advisers. 

HHM’s L’Italien recommends having accountants involved throughout the process. “They’re more knowledgeable on the tax provisions and they’re more involved in the day-to-day business and financial information than I am,” she says. 

Petrey suggests keeping in contact with those outside the company who are vital to operation, such as insurance agents or those who help to keep everything in line with government regulations.

What most business owners don’t understand as they start the process, L’Italien says, is just how long and in-depth it is. Patience is key. In one case she offers as an example, a third-party deal fell through after two years of work. 

“I can’t emphasize enough how important good lead time is, no matter the process,” she says. “The key one is the amount of time it takes on every level. Not just the planning, but also how long it takes an outsider to do due diligence and how long it takes to get a letter of intent or purchase agreement. You’re going to be asked for everything under the sun.” 

Business Equity Advisors’ Rossi tells companies that looking at everything is an understatement; the team is going to probe into every aspect of the business, how it functions and how it could function, even getting into the owner’s wish list for the company.

“If he wants to be gone in five years, what we do after the fact-finding work is determine if that’s feasible,” Rossi says. “A lot of questions come up to figure out if we can do that in that time frame.” 

Copyright 2024 The Business Journal, Youngstown, Ohio.