Succession planning: A smart move today for the future of your business
Acting now can strengthen operations, increase company value
One of the last things private duty company owners may want to consider is the day when they no longer own their businesses, yet the process of succession planning is one of the most crucial exercises they will ever undertake. Careful planning today for a future event will help owners achieve their long-term financial goals, preserve a vital community resource, and improve organizational performance in the meantime, industry experts say.
Successful business transitioning is an unquestionably difficult proposition. The process itself is time-consuming and requires focusing on long-term events amidst day-to-day challenges. It can also be wrenching, demanding owners' introspection and honest assessment of organizational strengths and weaknesses. For family-owned businesses, in particular, it may require confronting difficult issues long put on the back burner and making hard decisions about children's capabilities, experts say.
Transitional periods can be problematic
The actual transition, because it disrupts the status quo, can likewise be problematic. Changing ownership ranks with initial start-up as one of the most traumatic events in the life of an organization, says Robert Fowler, CMC, a management consultant based in Atlanta, who specializes in advising executives of closely held companies. It is a time when "all relationships are in jeopardy - the bank, suppliers, customers, and employees," he says. Add to the equation the possibility that second- or third-generation owners lack the interest or talent necessary to lead or have sharply different opinions about the way the business should operate, and you have a situation ripe for failure, experts caution.
Statistics bear this out. Fowler estimates that only a third of family-owned companies survive the first-to-second generation changeover. As few as 15% may pass into the third generation's hands. Nonfamilial acquisitions face equally long odds. "Most acquisitions are not successful because the buyer doesn't integrate it properly in the existing business or doesn't understand the business," says Fowler.
You can overcome such formidable odds, however, with a thoughtful succession plan that addresses organizational management and ownership transition along with estate-related concerns, sources say, (see related story on succession plan elements, p. 119) by incorporating the following points:
r Do it now.
Caught up in the day-to-day, rough-and-tumble style of 1990's home care operations, closely held or family-controlled private duty owners may be tempted to postpone preparing for far-off company succession. "It is the No. 1 thing business owners procrastinate on," says Fred Roa, president and chief executive officer of Telesis, a home care business brokerage firm based in Franklin Lakes, NJ. Less than half of the approximately 15,000 privately owned home care and private duty companies have succession plans, he estimates.
Complicated feelings about their own lives, identity, and family dynamics compound owners' reluctance to divert time and energy from immediate concerns. Relinquishing company control may be an individual's "last patriarchal or matriarchal act, and nobody wants to think about his or her own demise," Fowler adds. Owner-parents may also have difficulty reconciling equally loving each of their children with unequally granting company control, according to Roa.
But the consequences of delay can be severe. With gift and estate tax rates up to 55%, inadequate planning may force family members to sell the company, despite the original owner's desire to pass it on. And while heirs may leap the taxation hurdle, without a succession plan, they may not clear the potentially equally dangerous obstacle of well-managing the organization, experts say.
Death and retirement may not even be considerations of private duty owners who are now in their 30s and 40s. But now is the time to start planning, sources say. It may take two years to develop a succession plan and another 10 to 20 to fully implement it, Fowler says. Even if other factors such as burnout and boredom intervene before the original succession plan goes through, time devoted now will not be wasted. Planning will help strengthen day-to-day operations and make your firm a better value whenever it is sold, he adds.
r Communicate openly.
Good business succession planning starts with frank family discussions, says Russell Strand, CPA, CFP, a financial planner with Planning Advisors Limited, a financial advisory firm based in Bethesda, MD. "Frequently, owners of businesses haven't really included their children in on their business thoughts, and they assume their kids know about the business and want to be involved in it," he says. Parents may ultimately suffer great disappointment when a child to whom they have given the business subsequently sells it early because he or she never really wanted it. Family members may be afraid to be honest, particularly if the owner has a forceful personality. "There is never enough communication," Strand adds.
r Devote time.
"Succession planning is a difficult, painful process because it requires a real assessment of the strengths and weaknesses of the business," says Strand. To facilitate such review, encourage honest discussion, and help family members step out of their everyday roles, consider a business-planning retreat, Strand advises.
r Consult advisors.
Consult experienced advisors early on, says Marc Catalano, president and owner of Hialeah, FL-based Catalano's Nurses Registry Inc., a firm started by his parents. The high stakes involved in business transitions - organizational control and continuation, retirement funding, and company valuation - could make for very costly errors. Conferring with professionals who can help you maneuver through myriad tax, estate, and succession issues will better the odds of a smooth and successful transition.
r Conduct an organizational assessment.
Preparing your company for a future leadership transition begins with a realistic evaluation of its current position. "The economy, markets, competitors, and technology all change over time. [However], too frequently, owners who have run their company for a long time have become blind to changes in the marketplace and the company's real strengths and weaknesses," says Fowler.
A top-to-bottom assessment should help the owner better understand the business, including his or her own strengths and weaknesses. Look, as well, at what you do as an owner, Fowler advises. Assess the way you spend time each day and how your job as chief executive officer has changed. Such introspection will help clarify issues you and any successor must confront, along with required management skills, he adds.
You may also consider outlining the overriding business principals or philosophies that have guided you over the years. Identifying and "passing along your time-tested policies is a powerful aid in helping your successor gain an understanding of what [does and does not] work," says Fowler.
r Address family ownership and control issues.
While successor-owners committed to their family's enterprise may continue its profitable operation, they - and the family- must navigate many potentially explosive issues to make that a reality, sources advise.
r Objectively evaluate your heirs' abilities.
"It is typical that an owner wants the children to stay in the business, but they're not capable," Roa notes.
Separating your love for your children and their management abilities may seem cruel and will be difficult, but "a family business must be run like a business; and no matter how much you love them, you can't make [your children] competent," says Strand. A business advisor may be particularly helpful in assessing your children's abilities.
If you believe your child has management potential, there are several actions you can take to test and develop that talent. Require him or her to gain several years of professional experience outside your company. When your child returns to the organization, do not create a position. Instead, allow him or her to perform an existing job for which he or she is qualified, Roa advises. Creating a job to accommodate an heir will demoralize the organization and undermine succession efforts, he adds.
If your child proves capable, give him or her increasing responsibilities and authority to make decisions. This will challenge him or her, keep the child interested in the company, and give him or her skills to some day run it, Strand advises.
- Give one child controlling interest.
"It is a loaded time bomb if one sibling doesn't own 51% of the company," says Roa. "This runs against the grain of most parents, who try very hard to be fair and impartial with their children. Normal parenting rules, however, do not apply when it comes to choosing a company successor. The child with the best overall qualifications to lead should be given unequal preference to eventually take over," he continues.
- Compensate all your children.
While owner-parents should select only one person to control the company, they should monetarily compensate the other children so that each receives equal inheritance, Roa advises.
- Recognize failure.
Sometimes family members are simply unable to work together. Should this situation exist, recognizing the problem and acting accordingly may preserve your company and maintain its value, sources advise. "Some families are just not good for the long-term, but [certain family members] have blinders on and just want [the business] to go on. People don't have common goals anymore and transition to a new owner is difficult," says Strand.
Clues to family dissension may be subtle. Family members may not express their unhappiness outright and instead may withdraw or mope while at the office, or only speak to certain other family members outside the office, sources advise. Faced with such dissension, the owner should evaluate whether the situation is correctable. If it is not, he or she should develop a succession plan that does not contemplate continued family ownership. (See related story on tips for selling your business, p. 121.)
- Prepare heirs.
"Succession can't just happen on a piece of paper. [Your heirs] need to understand enough to know what's important and what must be dealt with immediately," says Strand. It is also important that surviving family members understand the business enough to have realistic expectations about its value and operating potential, he adds.
r Develop company management.
"Businesses highly dependent on the owner's charisma and presence are very hard to sell. Owners who haven't developed middle management don't have a business; they have themselves. And an owner can't sell a business if it can't stand without them. You have to sell the management," Strand advises.
Roa concurs. "If you don't have good people and haven't delegated properly, the business is worthless and buyers know it," he says.
Invest and train capable middle managers, sources advise. If an heir is not going to succeed you or is not ready to take charge when you expect to step down, consider grooming a general manager who can run the company on an interim basis, Fowler suggests. Do not hesitate to bring in outside management if insiders - either heirs or employees- are not capable, he adds.
Test your control quotient and decision-making abilities of others by "seeing what happens if [you're] not involved. Take a vacation. Let someone else do it. If you can't get away, seclude yourself for several days of planning in the office, and tell your staff you're not taking any operational responsibilities during that time," Strand advises.
r Know when to let go.
Disengaging at the right time may be one of the trickiest succession planning issues a private duty company owner faces. Recognizing that you are no longer the best person to run your company takes sensitivity, humbleness, and courage, sources advise. Timing is especially important if you are ceding control to a child.
In Catalano's case, the Catalano's Nurses Registry ownership transfer was "totally seamless." Although he now owns the company, he and his mother work side-by-side. "She does what she does best, and I do what I do best," he says. Such successful transitions are rare, says Fowler.
r Clean out the company closet.
"Too often we put off the difficult issues, letting problems [such as employees who are past their prime and poor contractual and vendor relationships] continue far beyond their time," says Fowler. "Recognizing the transition period is going to be difficult anyway, why not clean out some of the cobwebs and make your successor's job that much less difficult by limiting the problems they will confront?" he asks.
Private duty owners commit much time, energy, and capital to their company's successful operations. Most are proud of the service their companies provide and want them to continue as a valuable community resource. Developing a sound succession plan can help that wish become a reality.
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