By Bob Stewart
Everyone who has built or run a successful business wants that enterprise to last longer than their tenure—or even longer than their lifetime. But businesses require vision and leadership. What happens at the point in time where the person providing that vision and leadership steps away?
Platinum consultants have advised hundreds of businesses as they have worked through this inevitability. Although we have learned much about what can be done to sustain these businesses, we have also learned that no two businesses are the same. Yet there are common issues that need to be addressed.
Who should own the business in the future?
If it is a family-owned business, will the ownership group become too large over the generations? Do some junior-generation family members feel trapped into sustaining their parents’ dream, which they might not share?
We have worked with 50-50 business owners in need of a plan. In a particular case, one of the two owners was ready to retire but the other owner wanted to stay on. Unfortunately, the remaining partner had no wherewithal or interest in buying out his partner. This created an almost insurmountable impasse. Miraculously, a third-party interested in buying the entire business came forward. Because the second partner was not ready to sell, she agreed to first only buy the interest of the retiring partner, but on the condition that the remaining partner also sell to her a 1-percent interest so she would avoid becoming hostage to an untenable situation in the future.
In another scenario, the family did not want to sell their business because it was an important employer in their community. The next generation had little enthusiasm for operating a successful, but mature business; their dreams were elsewhere. After a long process, that family decided to sell their business, but the buyer had to agree to keep the operations in place for at least 10 years. Since the transaction, the buyer has become a strong corporate citizen in that community. And the proceeds from the sale of the business enabled the next generation to pursue dreams of their own.
Among a group of private-equity owners there might be a difference of opinion regarding ongoing ownership. These circumstances demand some path for liquidity for owners wanting out. We have worked with businesses that offer programs for redemption using the cash flow of the business, and we have worked with businesses that have established a transparent “marketplace” among owners enabling one owner to buy from another owner at a mutually agreeable price. And we have worked with businesses having a hybrid of these programs.
Private equity funds usually have an expected timeframe for owning a business. Frequently, family offices will hold cash-generating businesses indefinitely. Different owners have different wants and needs.
With respect to ownership, the following options are available:
- Continue ownership by the owner or owners and their heirs.
- Continue ownership by some of the owners’ heirs, often those who work in the business.
- Sell to a family member. (For example, we have seen this done where the senior generation has re-invested everything they’ve made back into the business and have no other retirement savings.)
- Sell to an outside third party
- Strategic buyers can usually derive the most synergies, so they can usually pay the highest value.
- Private equity fund owners, or private-equity-backed businesses often have the cash to pay more up front resulting in more favorable terms for the sellers.
- A management buy-out enables the ownership of the business to pass to those who helped build it, and usually ensures a continuity of business mission and values, but frequently requires seller financing.
- An employee stock ownership plan enables most employees to enjoy a bit of ownership but is only recommended for businesses with predictable cash flows and well-crafted financing.
Who will provide leadership for the business?
If the business ownership remains in the family, then leadership should remain in the family only if a family member has the business acumen, experience, maturity, communication ability, aptitude and passion to operate the business successfully. Such qualities are not passed through genetics. Frequently the senior generation will step away from leadership before the junior generation is seasoned-enough to take it on. In these circumstances, an interim, non-family CEO is recommended. If a business is being sold, then the new owners will decide who will run the business. For a non-strategic buyer, the business has more value if there is a person in place who can successfully lead the enterprise.
Who should make decisions about the company’s leadership?
We believe it is very important to have a sound governance structure in place for the long-term strength of the business. Best practices suggest that the entity be governed by a board of directors that includes outside (non-family) voices. The governance structure enables quick replacement of leadership, should that ever become necessary. It also provides feedback to the CEO based on what is best for the health of the entity. And that provides “cover” for the retiring CEO if there is no one from the next generation is ready for the CEO role. Generally, the full board will do what is right for the business, while a solo decision-maker might be susceptible to family pressures and emotional leverage.
Conclusions: Transitions in business come in many different flavors. There is no right way and there can be no cookie-cutter set of steps. One thing we do know is that transition planning takes time. It is best to begin the process when the business is operating smoothly and there is no crisis. Start now. Understand the possibilities. Put the right governance structure in place. And all of these things will make your business resilient when the time of change inevitably arrives.
Bob Stewart is a Partner at Platinum Group. An attorney, CPA, business manager and entrepreneur, Bob has extensive experience in international business, negotiating complex business transactions, turnarounds and mentoring across a variety of industries. He enjoys filling many roles including those of interim manager, corporate oversight, general counsel, consulting advisor and transaction specialist. If you would like to connect with Bob, seek help or just answers to a few questions, he may be contacted at firstname.lastname@example.org or 612-964-8072.