Your Company: The Next Generation

An exit strategy isn’t just for those thinking about retirement. What happens if the business owner — due to an unforeseen life event — is suddenly unable to carry out his or her responsibilities? Less tragically, some business owners may begin to feel their talents are better applied to a new venture, requiring successors to take over their existing posts.

The good news is that succession planning is closely linked with growth management.

“The things that you need in place for a transition to a successor are the things that you need to operate a good business: a solid technology base with good software, the processing of solid reporting and quality personnel,” says Debra Ellis, president of Wilson & Ellis Consulting, a catalog/multichannel consulting firm.

All in Your Head
“What’s so prevalent with many businesses is that the entrepreneurs have everything in their heads, and they have not put it down in any kind of systematic form so anyone else can make use of it,” says Bill Sornstein, principal at Succession Strategies, a consultancy that works with family-owned businesses. This information should be documented. Develop best practices so proper systems can be implemented for eventual successors to use.

Last June, technology distribution giant Ingram Micro Inc. acquired privately held B-to-B consumer electronics cataloger DBL Distributing. Bruce Kuperman, DBL’s senior vice president of sales, remained with the company and was close to the deal. He recounts that founder and former president and CEO David Lorsch — whose initials still comprise the company name — and his management team began working on a succession strategy well before inking the agreement.

“As the business continued to grow, we said that we needed to have some kind of succession plan should something happen to David,” Kuperman says. “We needed to put things in place so that even as we continued to grow and become a bigger company, the outside world would see that we had a game plan.”

This involved assessing all aspects of the business, including sales and operations, to identify weaknesses. “To support the succession plan, you want to build the infrastructure up so it can support the post-owner environment,” Kuperman explains. “You have to take a step back and look at where the holes are.”

The presence of a clear-cut succession plan made DBL a solid prospect for its acquirer, according to Kuperman, because it was evident that the seller’s management team was organized and focused on its core business. “That, coupled with the fact that we brought in the right team members to run different aspects of the business, made it simpler for someone to come in and acquire us for the money that the company was sold for.”

Smooth Transition
DBL’s transition from a privately held company to a subsidiary was, according to Kuperman, a smooth one. Lorsch left in December 2007, and DBL’s decision to carry out succession with new owners was, in large part, due to the next generation being too young to take over. He admits he did get the jitters.

“Whenever you have a company come in and buy you, promising ‘We’re not going to change anything; don’t worry, life is good,’ you have to wonder if it’s true,” Kuperman says. “You have a time element in there that, if you do not believe what you’re being told, you’re not focused on the game.”

During a succession, managers must communicate with their staff to encourage continued focus on the core business. “You have to be able to deal with people on your team and say, ‘Here is the message. I believe the message. Let’s not take our eyes off the ball.’”

Ellis advises that once the succession is imminent, business owners start by informing upper management, working their way down until everyone in the company is aware of what’s going on. It’s crucial that everyone feels like they’re being taken care of. As long as people feel comfortable that they’re going to be taken care of, it’s going to be a fairly easy transition.

“That may mean that they continue with the company,” Ellis says, “or that they are leaving. But for the ones that are leaving, have an exit strategy for them.” If people know that in six months they’ll be gone, they have the opportunity to plan for another job. “You can help them to find a job, or, in some cases, you’ll need to give them a severance package.”

There’s an emotional element that comes into play, as well. After 18 years in business, a large portion of DBL employees had strong relationships with Lorsch. “It wasn’t that they were saying goodbye to their jobs; they were saying goodbye to the owner of 18 years," Kuperman recalls. "When the owner does leave, those people who’ve been with him the longest need the most attention. They’ve come to rely on the owner very strongly.”

Family Ties: How Tight?
At burton + BURTON, a balloon and gift products supplier based in Bogart, Ga., owners Bob and Maxine Burton don’t include selling the company in their succession strategy. Their son and daughter began their careers working outside of the company, and both are now working in the family business. But this doesn’t mean they'll be the eventual successors.

“The next generation is starting to come into the business, but we’re not opposed to professional management,” says CEO Bob Burton. “It doesn’t have to be a family member; we just need people that can run the business.”

With a staff of about 350, the Burtons began laying the groundwork for succession years ago. “We knew we needed someone that had some corporate background and management experience,” Bob Burton explains. “Once you get to a certain point, with a certain number of customers, you realize that there are folks out there that know some things that you don’t know.”

Emotions also run high for the person — or people — being succeeded. And while some have trouble letting go of something they built from scratch, oftentimes this reticence is rooted in concern over financial stability, says Rachel Owens, a principal at Succession Strategies.

“If business owners don’t start to build outside assets away from the business itself as they get older,” Owens says, “all their future stability is now tied up in the success of the business ... Sometimes owners aren’t comfortable with relying on the successor to continue to generate the income they need.”

Bob Burton emphasizes that in bringing potential successors into the fold, it’s necessary to let others take on responsibility. “It’s important to let people make decisions and stand back,” he says. “Things won’t be done exactly the way that you would do it, but there are different ways to capture those goals.” «

Carolyn Heinze is a freelance business writer/editor based in Vancouver, B.C., Canada. You can contact her at carolynheinze.blogspot.com.