The human and strategic sides
However, the prospects for perpetuatingyour business do not have to be that bleak. The purpose of this series is to help you avoid the fate of those 90% and to create the future you choose for yourself, your business, your partners and your employees.
You have probably been reading Bart Basi's series of feature articles on succession planning. Those articles are chock-full of helpful hints, how-tos and good planning techniques for the financial and legal aspects of succession planning. This series will supplement Bart's words of wisdom by focusing on management issues: keeping your strategy fresh, finding and motivating managers who can help you grow your business, involving family members appropriately and preparing the next generation of leaders.
Before we get too far into this, though, I want to address a point that is too often misinterpreted. Some business owners purposely plan to not perpetuate their businesses for another generation. They prefer to operate their companies until they're ready to retire or try other things, and then sell it to a larger entity. We all have seen this happen time and again. In fact, consolidation and sell-ups and roll-ups are rampant in all distribution industries, from plumbing supplies to automobiles to HVACR to banking.
In my opinion, there's absolutely nothing wrong with this "sell-up" option. In many cases, it is positively the right thing to do. I've worked with many business owners who go through all kinds of hoops - and make very significant strategic errors - just to avoid this option. They believe there's some kind of shame or failure associated with "selling out" to the big guys.
But if your plans are to keep the company independent, there are ways to compete successfully against these 500pound gorillas. Showing you how to do that is the focus of this series. However, I promise you that hunkering down and whining will not appear very high on any of my how-to lists. Putting your head in the sand is a fatal error, and nostalgically adhering to the good ol' days is a mortal sin.
So let's get rolling, and we'll start with the bugaboos. What do you think are the most frequently cited reasons that independent and family businesses fail to survive into the next generation? In your own case, what are the most likely reasons your business won't survive into the next generation? To help you identify the mostcommon threats, see the sidebar. Follow the instructions and rank the six causes of business demise from 6th to 1st in importance. Then compare your responses with the information below.
The top six problemsNow let's check your best guesses and intuition vs. the results tabulated from many business owners across all industries in the United States. Those who have gone through a failed transition rank the causes of their problems - from least common to most common - as follows:
6. Divergent goals and needs of the owners, partners and/or their families. Many of the ideas and techniques described by Bart Basi are designed to avoid this quandary. Nevertheless, the land mines are numerous. Further, they tend to increase and become less predictable with each ensuing generation. I know of many partnerships that have been very cozy until the financial condition of the underlying company changed.
Otherwise agreeable partners can suddenly have very different needs and expectations when the company gets in trouble and the bank wants personal guarantees or additional equity. For equally supportable reasons, one partner or family member may want to bail out while another wants to bet every asset he has to save the day. This also holds true when a company begins creating new wealth. Some owners are ready to cash out and go to the beach, while others want to reinvest everything and compound their opportunity.
5. Conflicts among the potential successors seem to occur most frequently in family businesses. Surveys have shown that nearly $10 trillion in business assets will be passing to the next generation during the late '90s and the first several years of the next century.
This bubble is related to baby boomer demographics. An unusually large number of private businesses were created between 1945 and 1960 by returning servicemen, who are now in their 70s. Even the healthiest and most stubborn of them are now looking at succession plans. Quite often, they look at their vice presidents and see their own children.
Frequently, no groundwork has been laid for naming one of "the kids" as heir apparent. No one has ever differentiated among the siblings' power or potential. The expectation has simply been: "You love each other. You can work it out." All too often, I've had to help clients face this very sad situation, and somehow justify a difficult choice at this late date. Sometimes we find everyone a role he or she is satisfied with. Sometimes we are able to negotiate an amicable departure of one or more of the siblings. And sometimes the only available option is to sell or liquidate the business.
4. An entrepreneurial leader's inflexibility and resistance to change. In other words, "We have met the enemy, and he is us." There are those of you who intend to "die with your boots on" and wouldn't want it any other way. That, of course, is your choice and may be an excellent plan for maximizing your own sense of worth. The only problem with this approach is that it leaves no escape hatch. You go out swingin' - and your company takes a curve ball over the edge of the plate for a called strike three.
This phenomenon - entrepreneurs becoming increasingly inflexible - has been shown to follow from many of the characteristics that made them very successful businessmen in the first place. They love their work. They take charge. They make things happen. It's just that these strengths may become their dark side later on. They won't involve others, even those with decades of reliable experience. They won't vary from a proven formula for success, even though that proof has years and years of rust on it. They won't delegate, even as their business gets too big to be controlled from one office. And they quit trying to keep their company growing and fresh as their need for more wealth diminishes and their energy level wanes.
3. Weak next-generation leadership. This is the evil twin of the "conflict among successors" problem. Instead of more than one successor expecting the throne, there is none. None of your kids has stayed in the business - if they tried it at all. The same for your partners' family.
So you turn to other managers in your company. You appreciate the hard work and loyalty of your key people, but none of them is CEO material. The business hasn't needed and couldn't afford more than one executive. You're finally ready to focus on your golf game, travelling or being with the grandkids, but you've got nowhere to turn.
Here again, I get too many calls from business owners stuck in just this dilemma. They see no solution except to sell out, but that doesn't seem fair to their employees. Further, their plan was to be able to stay around the business even after they had "retired." They don't want to run the company, but they would like to work with the computer system, or do a little marketing or some engineering projects, and certainly to keep relating to the customers. One solution we sometimes try is doing an executive search for a new manager/owner. This sounds good on paper, and sometimes it works out beautifully. But it's a riskier proposition than many people realize. I'd say the odds are less than 50% for finding the right person the first time. And that's if you go through a very thorough search and professional selection process.
2. Money. There isn't enough capital to fund the business's needs, as well as the IRS's and the ongoing expectations of families and partners. You already know how difficult it is to keep a business's cash flow where you want it. And if you've been wrestling with that for 30 years, I can guarantee that you've had plenty of days when there was nothing on the bottom line except blood, sweat and tears.
On top of all that, a business going through a succession faces a nest full of other baby birds with their mouths agape. If you don't plan ahead, the IRS's mouth will be bigger than you and a whole flock of your buddies could ever keep full. The emphasis here is on "if you don't plan." It won't be the IRS that destroys your business. It will be your failure to plan to avoid the revenue men!
I always kind of cringe when I hear business owners blame the IRS, just as I do when they blame the regulators or the bankers or any of these external forces. Sure these "bad guys" tilt the playing ground against free and easy cash flow, but that's just part of the system our society lives in. And you've known that since you got your social security card and your first paycheck!
In addition to all of the above, during a transition era, your business will face the needs (spoken or unspoken) of a new generation of heirs. I've seen many businesses that were quite sufficient for supporting one family but were tom asunder trying to support two or more. There just wasn't enough to go around, and the parties involved weren't able to agree on how to divide up the insufficient funds and get on with their lives.
Also, as the generations increase, ownership tends to become more complex. You end up with passive investors who are highly motivated to receive dividends or S corporation distributions beyond their taxes or (horror of horrors) have their shares redeemed on a consistent basis. Dividends? Are you kidding? When's the last time you saw one of those?
1. And the No.1 reason succession plans fail is (drum roll, please) a maturing business life cycle and increased competition. In other words, your strategy gets stale. As we'll see in great detail later in this series, the single most precious asset any business can have is a "top of the mind" market position. You're known as the supplier of choice among all the mechanical contractors in your region. Or you're the No.1 player in the country when someone is thinking about getting heated water to all the right places in his new car wash facility. Or when upscale homeowners pick out their fixtures, they ask for your brand by name.
Being the dominant player in any market, no matter how small, is extremely difficult. And it's usually even tougher to keep that position. As the Bulls and Broncos and Cornhuskers and Wildcats say: "Everyone plays their best against us. There are no easy games." You've made yourself a market. Now everyone else sees what a good idea you had!
Frankly, when I see those one out of three survival statistics, I think to myself, "Those numbers probably aren't much better for bigger or public or firmly entrenched companies." Take a look at the companies comprising the Dow Jones Industrial Average. These are the 30 most entrenched corporations in America. Of these giants, only 40% have survived intact from 1968 (one generation) and just 30% from 1938 (two generations). For example, when's the last time you heard of the Distilling & Cattle Feeding Co. or Nash-Kelvinator Corp.?
Or listen to Bill Gates. Has anyone ever been more successful in carving out a dominant position? Yet he invariably talks about and focuses on the next technology. Sure, Microsoft won the war for PC operating systems and made fabulous amounts of money in the process. But Mr. Bill knows that without constantly re-evaluating the market and repositioning his company, Microsoft is likely to become about as valuable as IBM's leadership in typewriters. You can't rest on your laurels, especially in this speeded-up, hyper world.
Top priorityAnd this isn't because of the estate tax laws. And it's not because there's no one out there who could run this business. It's because the business owners haven't made it a priority to develop a business that can sustain growth. This is something that the CEOs of public companies could never get away with. But as Aldous Huxley stated, "A man's worst difficulties begin when he can do what he wants."
When you own your business, for better or worse, you can choose what you plan ahead and prepare for. For many people, the last thing they want to think about is the time when they're not needed. I understand this. I empathize with it, but I plead with you to get over it. You pride yourself on being able to set and achieve targets. Make business perpetuation a target! You can reach this goal with the same skill you've applied to all your other business issues. Make it, as Craig Aronoff and John Ward say, "the final test of greatness."
So here's the No.1 take-away lesson from this article: If you make it a priority to develop your organization to perpetuate itself and sustain growth, you'll succeed. In other words, try hard and win; don't try and don't win. And the rewards from this effort? Well, obviously, a business that is perpetuated and remains independent.
Even for those of you who say: "So what? I'll be dead," there are many byproducts of the effort that will make even a cynic like you sit up and smile. You'll find that it's more fun to go to work. There'll be less conflict. There'll be a shared sense of purpose that will literally fill the air. And most of all, there'll be more growth and profitability along the path.
If you're still not convinced, consider this: Research has shown that a successful business transition is worth 15 years of earnings! Fifteen years of early mornings and late evenings. Fifteen years of dealing with dishonest employees or losing one you thought would be your next sales manager. Fifteen years of difficult conversations with your banker and tough negotiations with your suppliers. Fifteen years of wooing a key customer and then losing him to a low-ball competitor.
Preparing yourself and your business for perpetuation won't be simple, but neither were all those other battles you've weathered. And though it may not be simple, it is straightforward.
The rest of this series will deal with topics such as:
I look forward to continuing our conversation.
Sidebar: How savvy are you about succession?What are the most likely reasons your own business might not survive and keep thriving into the next generation (another 30 years)? Rank the following causes of business demise according to what you think are the most common (#1) to the least common (#6) responses. Compare your responses with the top six reasons listed in this article.
- Weak next-generation leadership. No one to turn to.
- Conflicts among potential successors. Don't know how to pick among them and have the business survive.
- Divergent goals and needs within the owner's circle. Partners and/or their families don't want the same things.
- Maturing business life cycle and increased competition.
- Entrepreneurial leader's inflexibility and resistance to change. Won't keep up with the market and/or won't give up the reins.
- Limited capital to fund business needs, IRS, and appetites of owners and families.
From "Growing the Family Business: Special Challenges and Best Practices" by JohnL. Ward, appearing in Family Business Review, Volume X, Number 4, December 1997, pp. 323-337.