‘Succession’ Minus the Drama

The massive popularity of the HBO series “Succession” showed once again that nothing packs more entertainment punch than family members struggling with each other to inherit and control a business enterprise. Thankfully, most owners of printing and packaging companies won’t have much in common with Logan Roy, the patriarch of the TV show’s fictional clan. However, their stake in succession planning is every bit as serious as Roy’s would prove to be.

For those who have decided to leave the responsibilities of ownership behind, forming a succession plan and crafting a personal exit strategy are the same thing. Once the family member or employee most qualified to pick up the reins is identified, the owner can proceed to whatever the next stage of his, her, or their life will be. If no such candidate exists, succession planning becomes a matter of transferring ownership to someone else: either the owner of a similar company or a financial investor.

In this industry, succession through transfer of ownership to the next generation used to be the rule. Now, it is the exception. These days, we see limited interest from the children expected to take over the printing and packaging businesses their parents have built. Sometimes, another relative or an in-law may step in. But if no one from the family circle rises to the opportunity, the sale of the business to an outsider becomes inevitable.

Are the Kids All Right?
When a son or daughter is a potential successor, it’s essential to vet their candidacy — thoroughly and dispassionately. Parental feelings aside, the next-gen person must demonstrate the intellect, commitment, and management ability that perpetuating the business demands.

Sadly, we’ve heard too many stories of unqualified children wrecking what their parents ill-advisedly handed off to them. One owner knew that one of his two sons clearly lacked the acumen for the job, so he put the other son in charge. The owner passed, and within six months, the second son had shown that he was no more up to the task than his sibling as the business collapsed around him.

Selling the business to a longtime employee with a history of skillful management is one possible alternative to the transfer of ownership to family members. Another option is agreeing to a management buyout by a group of senior employees. The advice is the same as with family members: The would-be buyers must be carefully screened for their ability to keep the business stable and profitable.

An added question here is whether the employee buyers have the financial resources necessary to acquire the business: a loan from the Small Business Administration, for example, or cash from banks. If the sum falls short of the agreed-upon selling price, the owner may agree to hold a payable note for the difference. Holding a note for the full price sometimes happens, although this is as risky as it sounds.

Compensation as Appropriate
Whatever the arrangement, an owner stepping back from their business should be certain of deriving economic benefit from it — from the sale proceeds, or in some other form of compensation post-sale. For example, an owner in retirement could receive compensation as a member of the board of directors, as a consultant, or from another post-sale compensation arrangement until the final terms of the sale to the children or another buyer are satisfied.

In a sale to an outside party, succession planning at the senior executive level could have a definite bearing on how attractive the company will be to the buyer. This is particularly true when the prospective buyer is a private equity investor. These financial buyers may have no experience running the kinds of businesses they are seeking to acquire. If the selling owner does not intend to stay on in a leadership role after the sale, PE buyers will want to know that a strong, capable management team is in place to direct day-to-day operations. They will also expect the team to remain in place through the period they build out their investment platform with further acquisitions. This period can last years.

Strategic buyers — owners of companies like the ones they are buying — may be less interested in the cast of characters at the head of the seller’s organization. This would be the case in a tuck-in, where only the seller’s book of active accounts is to be absorbed. However, if the strategic buyer is a consolidator who plans to acquire the business as an ongoing operation, management structure could be a strong selling point.

Wanted: External Guidance
Before any of this can occur, the seller must determine how much the company is worth and what kind of price is reasonable to ask for. This is best done by a qualified third-party appraiser of printing and packaging businesses — an expert who knows the industry thoroughly, cultivates relationships with buyers and sellers, and has a strong track record of structuring and managing transactions on behalf of clients.

Understandably, appraising a business for eventual sale can be an emotionally fraught experience for the people closest to it. A third-party consultant, on the other hand, can approach the task with professional neutrality, exactly as the assignment calls for. That way, the tale of succession can unfold with a maximum of efficiency — and a minimum of histrionics.