How to Plan for Success in Succession Planning

Some say life is a beach, and if you’re a beachcomber or a professional surfer, that may well be the case. For owners of printing and packaging companies, though, “beach” is a metaphor for life after selling the business—the stage where you enjoy the rewards of having made an orderly and profitable transfer of the firm to a new proprietor.

Reaching that stage is an achievable goal, but the road to the beach from where you are now may be longer than you think. There are no positive sudden exits from the ownership of a printing company. Like any other business process, transfer of ownership requires adequate time and sufficient preparation to deliver the results you want.

Succession planning is what brings you to the beach and lets you fulfill your post-sale aspirations. It’s a two-part undertaking. First, you must identify someone (or perhaps more than one person) to succeed you in the executive leadership of the company. This is replacement planning. You then can proceed to exit planning—choosing the best way to transition out of your ownership stake in the business.

We advise all of our clients to be in succession planning mode whether they are thinking of selling or not. Why? Because of the time frame involved. Let’s work backwards from the hypothetical day you arrived at the beach after the sale.

Closing—completing the legal and accounting steps needed to seal the deal—took you anywhere from six to 12 or even 24 months. This would have included starting the process: identifying buyers, marketing the company and commencing negotiations. But, before any of these things could happen, the firm had to be prepared for sale. Depending on the financial condition of the business, you would have spent up to 36 months getting the house in order.

So, in the best case, it might be possible to finalize a sale in about six to nine months plus the amount of time it took to get your house in order beforehand. In the opposite case, you might find yourself on the road to the beach for as long as five years. As you can see, especially if you are in a late stage of your career, it’s essential to trim months off the back end by starting your succession planning now. That way, key decisions will already have been made by the time the clock begins to tick.

We know that the first phase, replacement planning, requires a change of mindset that isn’t always easy for owners to accept. Some ask, if I’m exiting the business and handing it off to others, why is it up to me to name a successor? Our answer is that this is what serious buyers expect serious sellers to do.

Today, many deals are predicated on having a strong management team in place to keep customers happy and assure a smooth transition. Private equity investors—increasingly important players in the M&A marketplace for printing and packaging companies—will insist on this or else require the selling owner to remain in an executive role for a specified period of time. If you haven’t picked a successor and aren’t prepared to stay on, you will limit the number of buyers to whom you can market the company. This could reduce your likelihood of making a satisfactory deal.

Again, even if you haven’t yet made a decision to sell, now is the time to identify potential future leaders, motivate them, and create a sense of long-term responsibility throughout your management team. It’s up to you to give those who will follow you their best chance of success under new ownership. You can’t delegate this! The obligation is yours alone, and it’s one of the most important parts of your job.

Exit planning begins with answering two central questions:

• What do I want to do after I am no longer involved in day-to-day operations?
• Will I have the resources to do what I want to do after the sale?

The first question is deeply personal; the second is more focused on the business outcome of the deal you hope to make. It’s essential to have clear answers to both. Without them, you can lose direction and enthusiasm to the point where you yourself become the chief obstacle to the sale.

What are your options for transferring ownership? You can sell the company, merge it with another business, gift it to family members or a charity, or put it in the hands of your loyal staff in an ESOP (employee stock ownership plan). Naturally, you will be looking for a return, and this goes to the heart of the matter in exit planning. If cashing out your ownership share fails to generate all the money you’ll need to fund your answer to the first question, you may be forced to change your expectations.

To avoid having to downscale your dream, do all that you can right now to increase the value of your company. This means gaining a clear picture of what the company is worth and what is driving its financial performance. Many different factors affect valuation, but three quantitative measurements—EBITDA, top and bottom line growth over time, and interest-bearing debt—determine most of it. Concentrate on increasing the first two and reducing the third.

Going forward, confirm that your decisions and actions are creating value. Understand which decisions and actions may initially reduce value. Always think like a seller—someday, you probably will be one.

What else can you do? If there are real estate issues to settle, clean them up. If you are unionized, try to maintain stability on that front. Manage large investments in equipment and technology in a way that will be compatible with an eventual decision to sell. Make sure that the objectives of all company shareholders are aligned. Fix all of it now—don’t leave it for the next owner.

Finally, seek guidance from a qualified M&A advisor. That expert will remind you that every preparatory step taken ahead of a sale will shorten your journey from here to the beach. The sun will be shining when you get there.