WHETHER YOU’RE THE one on the edge of retirement or you’re the next in line to take over the company, succession planning can be an elephant in the room. However, businesses need strategies for making these transitions, and for identifying and developing new leaders in the first place.
We asked Mark R. Hahn, senior managing director of Graphic Arts Advisor — a mergers and acquisitions advisory and consulting firm focused exclusively on the printing, packaging, mailing, marketing production services, and related graphic communications industries – for his thoughts on preparing for retirement or the sale of a business.
Q: When should a business owner begin to work on his/her succession plan? How long does the process take?
A: Starting the process three or four years before the planned exit date is best. If we’re talking about a sale of the company to an unrelated party, the active sale process averages six to nine months. Sometimes events intervene, and a quicker time frame is certainly possible. If an owner is financially challenged, we run a much faster process to move the business quickly and avoid further losses. For a healthy business, the process can take longer to find the right buyer and get all the pieces into place.
Q: What are key steps toward successfully retiring?
A: It’s important to effectively work yourself out of the business. Get the next level of management and leadership in place well before you begin the sale process; i.e., work yourself out of a job over time. If the succession plan is to transition the business to the next generation, the most successful scenarios we see are when [members of] the younger generation work outside the family business for three to five years before joining the company, and then work in different departments before assuming a leadership position.
Q: What are options for succession planning?
A: Many owners would like to pass the company along to the next generation. However, that obviously requires the members of the next generation to want to be in the screen printing business. If the younger generation is interested – and, I must add, qualified – then a long-term plan is needed, and owner should expect to financially assist their children with seller financing or gifting. For larger, more successful screen printing companies, the generational transition becomes harder. The value of the business is simply too high, and the proceeds from a sale are too attractive. If there are unrelated owners, family transition may present problems due to disparate interests, and a sale to unrelated parties is more likely. Private equity sounds attractive because they have the funding sources to pay more cash at closing. However, many screen printing companies are below the size threshold or do not have a clear strategic vision and value that will attract financial investors.
Q: What are some of the biggest mistakes an owner can make during this process?
A: The most common mistake is waiting until the business starts to decline; buyers are buying the future, so go to market when times are good. Sell on the way up. Another closely related mistake is when sellers have an inflated sense of the value of the company and set unrealistic expectations. A good deal is fair to both sides and represents the performance of the company going forward. Not having the financial statements in order can be a major impediment to achieving the best results in a sale process. Get the books in order, spend the money to get outside accounting oversight, and tighten up internal reporting procedures. Buyers value accurate and well-organized information.
Q: What are the risks of poor succession planning?
A: Some owners get trapped running their companies much longer than they had hoped. If illness, an economic downturn, or another event intervenes, an owner can find themselves with an unhappy end to what had been a happy and rewarding career. To paraphrase a famous quote, if you don’t know where you are going, you might just get there.
We’re divvying up our shares amongst key people in the organization. — Eric Solomon, Night Owls
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