As the following tip from Harvard Business Review points out, a group of vetted advisors can significantly improve decision making and make hard decisions both easier to make and execute. For the tip click this link. For the full blog post, click here.
Family Business Exits and Transfers: Pitfalls to Avoid
The following is reprinted with permission from Pinnacle Equity Solutions:
Amongst the millions of privately-held businesses in the United States, a large percentage are “family” businesses. This means that there is more than one generation of a family working in the business. As you, the exiting owner, begin to consider how you and the company will live without the business as it transitions to your children, there are a few key areas where you should focus your attention. This post lists five (5) of the pitfalls that you should avoid when planning your family business succession.
It is helpful to begin with a few statistics illustrating how often family businesses are trapped within these pitfalls. Namely, less than one-third of family-owned businesses survive the transition from the first generation of ownership to the second–and only 13 percent of family businesses remain in the family over 60 years.
Why such challenging longevity statistics? It could be in part to the added challenges that come with running a family owned business or, quite possibly, the many hurdles that can come with succession of that business. Given the importance of the business to the families involved–including your family members, the employees, the management team and your community, it is worthwhile to review this list of pitfalls and incorporate these ideas and plans for greater success in your overall exit planning. The five (5) pitfalls are as follows:
I. Transferring when the parents are not financially ready
Being a parent, you want the best for your children. Some business-owner parents who have children that are ready, willing and able to take over their business sometimes put their children’s needs above their own and rush into succession. For parents who are not financially stable to transfer a business, this premature move could be devastating to their retirement planning and financial security (not to mention what could happen to the business). There are also some business owners who may feel financially ready but have retirement plans that require significant funding, which may draw from the business, impeding possible growth. Waiting until you, the owner, are financially prepared for a transition is of utmost importance to your retirement and the success of the business.
II. Transferring before the parents are mentally ready
Waiting to transition until you are financially ready is one thing–but understanding when you are mentally ready is another story. Before a business owner transfers ownership, they need to assess how mentally prepared they are for an exit.
Remember that exiting a business that has been built by years of hard work and dedication can be a difficult emotional hurdle.
How involved are you in the day to day operations of the business? What will you do with your time when you are no longer running the business? These answers will become the key to understanding whether or not you are ready to move forward into the next stage of your life.
III. Transferring to children who do not know how to run a business
It goes without saying that many family members have been involved, in one way or another, in the family business their whole lives. But being involved and being in charge are two very different things. Many small business owners forget to realize that the new owners, most often their children, must possess or obtain very critical skills and experience to successfully run the business they are taking over. If key skills and responsibilities are missing from the background of a successor, then a part of your succession planning needs to be developed with the goal of training and developing that successor into a better and more qualified manager and leader. Alternatively, you may also be looking to hire, groom, and/or train support personnel to compliment the future successor’s weaknesses.
IV. Not taking advantage of gifting opportunities
There are a number of lifetime gifting strategies that can be implemented by the business owner to minimize, or possibly eliminate, estate taxes. For parents who plan to transfer the business by lifetime gifts or at their death, gift and estate taxes will apply based on the value of the assets transferred. To transfer the most assets at the least tax cost, it is important to use all of the discounts that are available. Experienced appraisers, attorneys and accountants can help maximize these discounts for tax purposes. There are a number of strategies for handling this type of wealth transition and a majority of them can and should be included in your written exit and succession plan.
V. Failing to Document the Terms of the Agreement in Writing
Many business owners assume that when dealing with family members there is no real need for a formal agreement, while others find it a difficult subject to broach, so many times there is no written agreement for the business transfer. The reality is that there is less of a chance of running into future problems if family business owners clearly define the nature of their relationship in writing. In the unfortunate event of litigation, more often than not, the family members will find themselves arguing over the terms of their oral agreements. With as many recollections of “the agreement” as there are family members involved. The opportunity is ripe for more confusion, frustration, anger and further division within the family.
Concluding Thoughts
These five (5) pitfalls should be addressed and avoided when building a plan for your exit and your family business transition. Careful planning can lead to more successful outcomes when you navigate these pitfalls and continually build, update and refine the plans for your family business succession.
Why Hiring Top Performers is Important
Hiring top performers is important because a top performer at any given position is significantly more productive than an average performer. According to one study of management and professional workers, the “Superior” or “Top” producers generate 48% more than “Average” producers and 96% more than “Non-producers”. [ref]The validity and utility of selection methods in personnel psychology: Practical and theoretical implications of 85 years of research findings. Psychological Bulletin, September 1998, Vol. 124, No. 2, pp 262-274. [/ref] One well known organization, The Container Store (one of the Fortune “100 Best Places to Work” for 11 years straight and twice as number one), has taken this kind of finding to heart and has a simple 1=3 rule: One great employee can replace three good employees. [ref]Verne Harnish communication September 2, 2010. [/ref]
If we take The Container Store’s ratio as an example, it means that if you can hire a top performer for a given position at the rate of $50,000/year, anything you pay over $16,667/year for average performers is a financial burden on your organization. Even if you cut the ratio down to 1.5=1, anything you pay over $33,333/year is a burden. This is the financial reason for making hiring top performers a priority. There are also non-financial reasons to hire top performers: Improved culture and morale, decreased turnover, top performers (like top athletes) make everyone around them better, and the fact that top performers tend to hire other top performers meaning that over time, you’ll have top performers at all levels of your organization.
Despite the financial and non-financial incentives to hire only top performers, we hear three objections:
- Top performers are hard to identify,
- The people who are not top performers have been with the company since the early days and I don’t know what to do with them, and
- I’m not sure who is a top performer and who is not.
Our response to these objections is:
- Top performers are readily identifiable if you hire using a process designed to select for specific backgrounds, competencies and organizational “fit”.
- By determining position accountabilities and the metrics to assess performance, it’s possible to sort between top performers and average performers. This opens the door to developing those employees who have the potential to be top performers and to re-assigning or letting-go those who do not have the potential–often by mutual agreement.
- See 2 above.
Small and medium sized businesses cannot afford the financial burden of having less than top performers at all levels of the business. Investing in hiring top performers can pay handsome returns. It starts with knowing what top performance is and moves to only hiring those who can perform up to that level.
Please contact us if you have questions or would like to discuss this post further.
Keeping Top Performers
As the economy improves (this is a “when” not an “if”), keeping your top performers can be a challenge. Right now it is an employer’s market. When the economy improves it will become an employee’s market and your top performers will be able to jump ship without worrying as much about where they will land.
To keep your top performers consider the following steps:
- Meet with them and really listen–simple but powerful.
- Discuss their performance. Ideally this is done with the aid of some sort of “position scorecard” that lists the things they have been accountable for doing and a rating or measure of how they’ve done. For example, if a person is responsible for customer satisfaction, satisfaction might be measured by a survey of customers.
- Assuming your top performers are true top performers, the scorecards will be positive and give you an opportunity to express appreciation for their efforts and success.The conversation can naturally flow into “where would you like to be in 3-5 years” and “what can I do to help you get there and keep you working at a high level for us”.
- Probe for motivation. The art of appreciation is taking into account what motivates a person. Telling someone who does a task well, that you appreciate their ability to get things done, means a lot more to them than saying the same thing to someone who is motivated to be part of a team and get along with others. In the latter case you want to convey that you appreciate their contribution to the team and their loyalty, for example.
- Probing for motivation can be tricky. Money, work/life balance, prestige, managing others, accomplishing tasks, being part of an effective team are all important motivators. Sometimes people are not clear about what motivates them and cannot accurately answer questions about what is motivating. The art of this is noticing the person’s behavior over time and divining their motivation. Giving them more of what motivates them makes them want to stay. Do not make the common mistake of assuming that someone else is motivated by what motivates you.
- Ultimately, if you have trouble divining another’s motivation, generic appreciation is better than none at all. While I won’t go as far as saying, “appreciation is the #1 important thing for employees”, it is true for the majority of employees, especially the ones you want to keep around. The exception is the entrepreneur or CEO (or wannabe). Appreciation is not as important to this type of person. This sometimes makes it hard for the top person to express appreciation to others–if I don’t need it, why should they.
- One more note to complicate matters further. Perhaps you’ve heard of the phrase, “hierarchy of needs”. A person’s need for money follows this theory which is basically, once you’ve taken care of surviving and then being comfortable, money stops being as powerful a motivator. It’s like food or shelter. If you don’t have them, that’s all you think about getting. Once you have them and don’t have to worry about them being present, their importance diminishes until they are dwindling again….
While listening to and appreciating a top performer is no guarantee of keeping him or her, it goes a long way toward keeping your company’s grass greener than where they might go. It also is a key part of establishing a positive organizational culture–helping to both retain and attract top talent.
Best wishes in your efforts to retain top performers!
Feature Article
Vital Growth Consulting Group was featured in an article in the Portsmouth Herald. See here.
Reprint – Why Do Business Owners Fear Exit Planning?
An interesting and noteworthy article to review:
Reprint – Why Do Business Owners Fear Exit Planning?
By Bob O’Hara
Vital not only to their future, but to that of their company, an exit plan is a business owner’s best defense against the unexpected. Yet, some otherwise savvy entrepreneurs will delay the process due to fear of conflict, of losing control or of not having enough financial reserve to support their lifestyle post sale or transfer.
With a comprehensive action plan, backed by the support of a team of advisors, even the most apprehensive business owner can see beyond the fear and build a successful future for all involved — self, family and the business. But first, you must define and overcome the obstacle(s) that have held your exit plan hostage.
Transition of Authority—Fear of Conflict
For some, the fear of conflict can hold up the works – particularly if the business is family owned and operated or if key employees are not members of the family. An exit plan establishes a hierarchy of authority and some business owners see this as pitting one child against another … or a child against a highly valued yet unrelated employee. The long-term good of the company is the ultimate goal; the transition of authority must be based on the ability to perform.
An honest assessment must be made of who can best helm the business upon your departure; while you want to believe your children are chips off the old block, they may not have – or want to have – the same skill set that helped you grow your business successfully.
Now is the time to determine if your successor currently exists within the company. Perhaps that individual is not ready for the position today but might have the ability to take over in the future; if that’s the case, some additional training may be in order.
Recognize that sometimes, in the name of “keeping the peace” business owners will relegate top level authority to the “wrong” employee. That individual might be an offspring, sibling or an unrelated staff member who has been with the company through the good and the bad. Or even worse, some avoid the situation completely, duping themselves into believing that the issue will one day resolve itself naturally. In reality, that rarely happens; instead chaos occurs in the absence of a clear line of authority or succession plan in place and the exact conflict the owner has avoided happens anyway.
Loosening the Reigns —Fear of Losing Control
Fear of losing control is also high on the panic button list. While most owners are realistic enough to recognize they must vacate the helm at some point, fear that the company will fail to succeed in the absence of their leadership can be a driving force to no action. And herein lies the irony — this concern will undoubtedly become reality since the owner failed to plan for his or her certain and eventual departure.
But by identifying and mentoring the key employees that will someday operate the business, the owner allows his or her vision of the future to be embraced by the next generation of management … while at the same time guiding their direction through experienced counsel. What some business owners fail to grasp is that stepping down as head of a company does not necessarily translate into stepping away completely.
Achieving Financial Freedom — Financial Fear
And then there is the financial fear, the worry that you may not reap enough monetary benefits to truly enjoy retirement. You should recognize that a sound exit plan is not unlike a crystal ball. If properly prepared with the assistance of key professionals, a plan can provide an insight today into your company’s future worth, and how that worth will translate into after tax dollars to fund your retirement. The comprehensive exit planning process should also calculate how much you need in non-business assets to achieve financial comfort independent of your business. Knowing the answers to these questions can mitigate this fear and put the owner on a course to achieving financial freedom.
Beyond the Fear Factor
Once fears are identified, conquered or at least set aside, it’s important to realize that no matter how skilled or experienced a business person you are, executing an exit plan is not something that should be done solo. A successful exit plan involves a number of elements – legal, financial, tax, to name a few. It is in your best interest to hire an experienced team of professionals, including an attorney, CPA and financial advisor/planner to assist you through the exit plan process.
Ultimately, your succession plan must integrate your exit desires – when you want to leave, how much money you need after business ownership and who you want to own the business. Exit planning is indeed a long and often emotional process. However, the benefits of a well-thought-out and documented succession plan can be invaluable. By overcoming the fears associated with the eventual “good-bye” everyone involved – you, your family and your key employees – will benefit when it comes time to hand over the company keys at some future tomorrow.
Bob O’Hara, CPA/PFS, MST, CExP is President/CEO of O’Hara & Company, PC founded in 1995 to address the growing need for entrepreneurs to create a comprehensive exit strategy from their businesses. O’Hara & Company hosts an educational website for business owners at www.exitplanning-edu.com. The company is located at One Olde North Road, Ste. 101 in Chelmsford MA. For more information please visit www.oharaco.com or call 978-244-9860.
CEO Succession Planning an Overlooked Task
More than half of companies today cannot immediately name a successor to their CEO should the need arise, according to new research conducted by Heidrick & Struggles and Rock Center for Corporate Governance at Stanford University. The survey of more than 140 CEOs and board directors of North American public and private companies reveals critical lapses in CEO succession planning.
“The lack of succession planning at some of the biggest public companies poses a serious threat to corporate health – especially as companies struggle toward a recovery,” says Stephen A. Miles, Vice Chairman at leadership advisory firm Heidrick & Struggles and a global expert on succession planning. “Not having a truly operational succession plan can have devastating consequences for companies – from tanking stock prices to serious regulatory and reputational impact.”
Stanford Graduate School of Business Professor David Larcker adds, “We found that this governance lapse stems primarily from a lack of focus: boards of directors just aren’t spending the time that is required to adequately prepare for a succession scenario.” Professor Larcker is a senior faculty member of the Rock Center for Corporate Governance, a joint initiative of Stanford Law School and the Stanford Graduate School of Business.
The 2010 Survey on CEO Succession Planning, conducted this spring, surveyed CEOs and directors at large- and mid-cap public companies in the U.S. and Canada, with 10% of respondents also from large private firms. Key findings from the survey include:
A full 39% of respondents cited that they have “zero” viable internal candidates. “This points to a lack of talent management and not paying enough attention to your ‘bench,’” says Mr. Miles.
On average, boards spend only 2 hours a year on CEO succession planning. “The full boards of respondents’ companies meet, on average, five times a year. Succession planning is discussed at only two of these meetings, at one hour apiece,” says Professor Larcker. “The nominating and governance committee – who often take primary responsibility for succession planning – did not fare much better; respondents reported that only four hours of meeting time is typically devoted to this topic each year.”
To read the full article see here.
30 June 2010 Exit Planning Event
A group of New Hampshire business owners and their advisors were treated to an overview of John Leonetti’s approach to exit planning by the author himself today at the 100 Club in Portsmouth, NH.
Mr. Leonetti is the author of Exiting Your Business, Protecting Your Wealth: A Strategic Guide for Owners and Their Advisors. He covered his process for determining the mental and financial readiness of an owner contemplating an exit as well as what exit options are dictated by the readiness levels of the owner. Exit options included Strategic Sale, Recapitalization, ESOP, Management Buyout, and Gifting.
Please use the contact us page to forward any questions or to put yourself on the mailing list for the next presentation based on the process outlined by Mr. Leonetti.
Are You Making An Impact?
In the midst of a series on influencing others on the site www.intellectuscoaching.com, I pose the question, “are you making an impact”?
People and products that make an impact are exceptional and stand out. People and products that fail to make an impact are quickly forgotten.
If your product or service impresses, moves, or otherwise “wows” people, your challenge will be supplying enough. Apple computer has, for the most part, mastered the art of making an impact. Consider both the iPod and iPhone.
If your product or service does not make an impact, the product or you become a commodity–something that is useful but not indistinguishable from other similar products or services. Think of laundry detergent, “light beer” or your typical grocery store.
We see marketing campaigns aimed at differentiating products that are commodities all the time. For example, beer marketing campaigns tell us how a particular beer is different and better, while blind taste tests of beer fail to indicate much quality difference between brands.
Is your product or service a “commodity”? Look to the example of Apple or better still, Zappos.com, to learn ways of distinguishing your product or service from the competition.
When it comes to you as an individual, are you a “commodity”?
The fact is that most of us are commodities. Our efforts, even if competent and conscientious, fail to make an impact or if they do, the impact is short-lived.
Superstars in the worlds of sports or entertainment, make an impact with their performances and do so consistently. Superstars in the world of business do the same.
Look for ways to make an impact through the clarity of your thinking, the creativity of your ideas, the value of your “outside the box problem” solving and, perhaps most importantly, by adopting the priorities of your boss or customer while getting things done. Working hard and being competent are good but not enough alone to raise your value from commodity to stand out.
Ask yourself, “how do I make and impact”? Focus on being more than just competent and conscientious. Think about how you can make an impact!
Exit Planning Gap Calculator
Vital Growth Consulting Group is pleased to announce the publication of its Exit Planning Gap Calculator tool.
The Exit Gap Calculator is available on the Vital Growth Consulting Group website. It is intended to provide an estimate of the financial gap between the CURRENT VALUE OF A COMPANY and the VALUE NEEDED TO EXIT AND MAINTAIN THE OWNER’S CURRENT LIFESTYLE.
The Exit Gap Calculator tool does not gather or record identifying information and may be used and reused to evaluate different assumptions (such as the mutiple of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).