Succession plans overlooked by biz owners: Preparing for inevitable difficult but necessary

September 26, 2005

Go ahead. Ignore the inevitable. Refuse to imagine a future where anybody else could take over that corner office of yours with the big mahogany desk.

You won't be the only one. But you'll regret it.

"The biggest mistake people make-they don't let go soon enough. They need to get other people involved along the way, maybe get them some equity along the way," said Glenn Scolnik, CEO of locally based Hammond Kennedy Whitney & Co. Inc., the state's largest merger and acquisition investor.

"It's kind of like somebody dying without a will. Nobody should die without a will," Scolnik added. "But a lot of people don't have wills because they just don't want to talk about dying."

All things must one day come to an end. Savvy business owners recognize the certainty of fate and plan well in advance. Others leave succession to unhappy chance.

That's why at the start of every potential deal, Scolnik said, he confronts the managers of his acquisition target with the "beer truck" scenario: If you step off the curb this afternoon and get hit by a beer truck, who runs this company? What have you done to prepare for that?

A great many business owners have never confronted that question, Scolnik said. It's an emotional topic-much more than, say, buying a new copy machine.

Fortunately, few management transitions are so overtly traumatic. Even so, successful business owners, with luck, one day get to retire. And many don't have

heirs who are interested in or capable of taking over the business.

The owners often invested the bulk of their personal fortunes in their businesses. How can they extract value without selling their beloved company out of state? Will the employees get a fair shake under new management? And not least, what might boost the company's final price?

According to Peter Christman, CEO of Palatine, Ill.-based business succession planning consultant the Christman Group, only a quarter of U.S. businesses have established formal succession plans. Christman said he has consulted on dozens of Indiana mergers and acquisitions.

Managers are so focused on the day-today needs of their operations, he said, they forget to think about the inescapable future.

"They don't even talk to their spouse sometimes about it," Christman said. "This is why we're on a kind of missionary path, preaching to ask these questions: 'Hey, John, you're 60 years old; what are you going to do to exit your company?'"

Being prepared

Analysis is the first step. To maximize a private company's value, it must carefully document its assets and activities. The process involves discussion with a company's accountants, attorneys and managers. Potential buyers want to see proof of profitability.

Armed with such data, a business owner can establish goals. Is it important for the business to remain rooted in the local community? Should key loyal employees be rewarded? Would the business be more attractive to a buyer from the same industry looking to increase market share? Or would a financial buyer from the venture capital industry pay a premium instead?

Indianapolis-based Periculum Capital Corp. often serves as the middleman for business buyouts. Periculum counsels its clients to begin transition preparations years before they'll be needed. It's a message they're not always ready to hear.

"We find great naiveté about succession planning," said Periculum Co-Managing Director Joe Broecker. "It's a very unnatural thing to sell your business, the one you've built and managed for a long time."

Unexpected events are what often prompt real succession planning. A competitor might call to casually pitch the idea of a merger. Or mergers elsewhere in an industry may cause the remaining players to shop around.

But by then, it can be too late. Smart owners do their best to plan the timing of their exit, so they can control it. The process unfolds over years, said Periculum Co-Managing Director Bob Shortle.

"We're working today on deals for 2006 and 2007," he said. "And we won't get paid until 2008. Trust is huge. You don't buy or sell a business every day."

For example, Shortle said, on 9/11, Periculum had several deals in negotiations. But in the uncertain market that followed, Periculum counseled its clients to delay selling their companies indefinitely until conditions stabilized.

Ensuring stability

When managed well, the sale process can provide gains for everyone involved. Ken Army, the former owner of locally based industrial centrifuge reconditioner Separators Inc., began talking to Shortle about the potential sale of his company several years ago. His chief concern was to ensure that the employees kept their jobs after the deal was done.

Periculum identified a dozen potential buyers for Separators, Army said. Locally based Monument Advisors eventually won the bidding process.

"When I acquired the company, I gambled everything I had. But I didn't do this by myself," said Army, 64. "The company grew because of everyone who was there. I wanted to make sure the employees who helped me would still have a position [after the sale]. I didn't want to just sell it to someone who would say, 'We don't need this guy, we don't need that guy, and we'll start cleaning house.'"

In the decade he owned Separators, Army said, it more than doubled its profits. But without the aid of Periculum, he wouldn't have found a buyer to pay what it was worth. Today, Army is slowly scaling back his involvement with the company as a consultant to its new management.

"They're the experts in doing something like this. I'm not, and I don't think I could have pulled it off without someone like them," Army said. "I could envision what I wanted, but I didn't know how to do it. They do this for a living, and they're good at what they do."

Rewarding employees

To reward employees more directly during a sale, some owners choose to form an employee stock option plan, or ESOP. George Cassiere, president of locally based ESOP consultant Pace Financial Group, said ESOP plans can actually increase the pool of money available in a company sale.

"The tax benefits associated with the ESOP [can] create a much larger pie," Cassiere said. "A lot of times, I can have a much more lucrative situation for everybody, including management and the key people, by factoring in all the benefits."

Muncie-based Maxon Corp. makes industrial combustion equipment, such as burners and valves for heat-process manufacturing. Founded in 1916, it is one of Muncie's largest employers. Many of its 450 employees were part of an ESOP. When the Maxon family wanted to sell the firm, Periculum stepped in to find a new owner who would keep it in Muncie.

Scolnik's Hammond Kennedy Whitney & Co. was the eventual buyer last year. Charlie Hetrick, Maxon's president both before and after the sale, said the transaction allowed the previous owners to retire while providing capital for Maxon to expand. Hammond Kennedy Whitney & Co. bought the company as a financial investment, and kept its management intact.

"We still run the company the same way it always was. The transition has gone very smoothly," Hetrick said. "They've done exactly what they said they were going to do."

The key to the smooth changeover was careful succession planning. Hetrick advises others to do the same.

"Have open discussions with people that deal in that business on a regular basis," he said. "You don't have to make commitments. But you have to understand how the process works."
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