Succession planning – not just an exit plan!
Whilst most business owners acknowledge that succession planning for their business is critical, when we ask them to define what it is and how they might do …
5min Read
In previous articles we have talked about Succession Planning being a process rather than an event, but this concept remains foreign to most private companies.
Over a wide-ranging lunch discussion with an investment banker yesterday, I got a very familiar answer to the often asked question ‘what is the number one thing you look at when investing in private companies’? Without hesitation the reply was ‘the quality of the management team’.
Many of you will have heard this before, but it’s important to reflect on what corporate advisers mean when they say this – and the core management capabilities they look at when valuing opportunities.
Included in this list are:
The thing about all these capabilities is that combined they form the basis of an effective ‘operational’ succession plan, which is all about developing and managing the expectations, energy and performance of key people and rising stars within the business.
And in turn, potential investors will apply a much higher valuation to a business who can demonstrate a history of this type of planning and process, given it is a key indicator for earnings sustainability and significantly reduces risks around principal dependency.
Company A
A $30M revenue family business in the logistics game. The patriarch is still involved in decision making as ‘Managing Director’ and his two sons run two business units as the GMs of each.
There is an intent for Dad to ‘step back’, but there is no advisory board in place and the boys have learnt on the job, with no management or leadership training along the way.
There is a loyal group of employees, but most people are doing the same jobs they have always done and are given Christmas bonuses each year.
Mum is in charge of the finances, supported by their long-term external accountant and a bookkeeper.
Margins are getting squeezed and EBITDA has dipped from $2.1M to $1.4M over the last 3 years (on flat revenues). Technology uptake is low and there is no formal goal setting or performance review program in place.
Company B
Also a $30M revenue family owned logistics business.
The patriarch stepped out of the business several years ago and sits on an advisory board with an external business adviser.
Two siblings are involved – one has completed LEAN training and manages operations, whereas the other runs Sales for the group. Both are on continuous learning programs for their respective roles and have identified their own ‘right hand man’.
There is a professional Executive GM in place (who the siblings report to) with a phantom equity scheme in place, supported by an experienced Financial Controller – and the business is advanced in terms of its use of technology, management dashboards and training programs.
Pricing is very competitive in current environment, but the group has managed to hold margins and grow revenue each year, with EBITDA improving from $1.8M to $2.4M over the last 3 years.
From an investor perspective, company A is probably worth little to nothing. Unless they address their management and principal dependency issues, the family is facing the all too common prospect of closing the business without realising value or enabling transition to the next generation.
The enterprise value of Company B is likely to be in excess of $7 million, but with great prospects of enhancing this value over coming years.
We see these stark differences between competing companies all the time, no matter what the sector, but unfortunately too many companies fail to close the gap.
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Interested in learning how an effective ‘operational’ succession plan can multiply your enterprise value?