CategoryBusiness Advice Archives — Page 7 of 8 — C. Lynn Northrup, CPA, CPIM

Succession – Planning for the Future

One of the key components of succession planning is deciding where the business should be going and who is going to provide the necessary leadership. This process is a double edged sword. It involves planning for both owners as well as the business. Things can get pretty emotional in family-owned businesses. Accordingly, it is very important to make sure the planning process gets done properly.The emotional process is what stalls many initiatives. It is critical to have a skilled outsider to help to balance the emotions, personalities, and politics of the family-owned business. An objective facilitator with no stake in the outcome dramatically increases your chances of success.

Organizational planning combines development of ownership plans with strategic planning for the business. Achieving balance between these two plans is the key ingredient. This function is where facilitators can earn their money. They balance management interests with ownership goals and the board. Many family-owned businesses don’t have a formal board of directors’ function. We think that boards provide a balance point between owners and management. The board provides a key role in providing continuity between business strategy and long-term vision that helps to preserve owner’s value.

When owners and the business look to the future, the shareholders have to ask the following questions:
• Where do we want to be in 5 to 10 years?
• Can the business survive without the founder?
• What are the goals of non-family team members, entrepreneur owners, and family of the entrepreneur?
• What are the strengths, weaknesses, opportunities, and threats associated with this business?

It is amazing how many family-owned businesses haven’t developed a succession and transition planning process. A well-designed and systematic succession planning process focusing on the family, management, and the organization of the business pays big dividends. This represents a huge opportunity for family-owned businesses to step up and do what they need to do. Planning for the future pays off.

Family-Owned Business (Family Planning)

There are tons of issues and challenges associated with succession planning. Most family businesses want the family to be involved with the business. This gets tricky when there is more than one child and even worse when spouses and cousins are thrown into the mix. Another component of the process relates to non-family managers involved in the business. They have a stake in the business and usually represent a critical link to the future success of the business.

There are many stories about fights and disputes that arise when family members get side ways over the selection of who is in charge. Without an effective planning and communication process, you open the door for lawsuits and fighting between family members. It doesn’t need to be that difficult when the succession and transition process is handled properly from the beginning. We use an approach that sets the stage for proper evaluation of both involved family members and non-family member managers. Our methodology makes a clear distinction between owners, boards, and management. This is done at the beginning and family owner plans are developed and shared with management in an effort to achieve agreement on how to move forward in a balanced fashion. Owners have a role separate from management and it should not be mixed with management responsibilities. These are separate roles and responsibilities. Open communication amoung family members is critical as they reach consensus on ownership goals and on the direction of the business.

One of the major obstacles to succession is the failure of entrepreneur owners to give up control of the company. This often is an attitude of denial and deceit relative to their own mortality. Once founders realize that it is healthy for them to move out of the center of the circle, we start to see progress. The lack of an effective ownership transition plan could be fatal if something unforeseen happens to the founder.

Our process involves family and non-family members in a positive fashion. By fostering effective communication, the business can focus on the right things and achieve a smooth transition. The failure to engage in this critical planning and communication process can prove fatal to the business. Maintaining a balance between all family owners and non-family management is the best way to secure a successful future and build the value of the business.

Family-Owned Business – Financial Planning

Usually most of the planning done by family-owned businesses is in the area of retirement and estate planning. Owners here are attempting to accomplish the following objectives:

• Avoid or minimize estate taxes
• Attempt to minimize built-in gain taxes on company stock
• Establish the value of their business
• Diversify investments
• Establish that there will be enough cash flow for their retirement years
• Provide for funding of estate taxes at death
• Assess and analyze the cash flow and financial statement impact on the business.

Unfortunately, this is where the succession planning process stops. There are many other components to the planning process that need to be considered. Our family-owned business planning process is designed to deal with the family and their goals in addition to addressing how the business will continue to be managed.

This later point is critical because the market in which to sell businesses has shrunk because of the economy and the credit crunch. Going forward in ways that preserve and build business value is an essential step in preserving adequate cash flow to cover the owner’s retirement. Finding the balance point for owners and management is a key element of succession and transition planning.

We’ll talk more about family needs and management planning in our future posts.

Succession Planning Issues

Here are some questions and issues for family-owned businesses that I hear from many of my clients. I thought it would interesting to share some of these questions with you. It will spark some thought and questions as to how to address these issues.

Succession Planning:

How do you make a smooth transition from one generation to the next?

How do you pass ownership and plan for future management of the business in a fair and equitable fashion?

What is an appropriate organizational design and structure for the company as it grows?

Are individuals well suited to their jobs and the business?

How does the senior and the founding generation accept “letting go” and turning over the business to the next generation?

How can a business that has never or very frequently planned, develop long-range plans for the future?

If you can’t effectively provide answers to these questions, relax because you’re not alone. The challenge of succession planning is one of the number one issues facing baby boomer businesses today. It is getting even more critical because of the difficult economic environment that exists today. Succession becomes more urgent because a willing buyer for the business might not be easy to find. Even if they are a willing buyer, they might have difficulty finding the financing to close a deal.

My advice to first generation owners of family-owned busineses to get the help from people capable of helping navigate through these difficult waters. There are no easy answers and spreading twinkle dust won’t get the job done. It will cost some money and it will take hard work. But when you think about the most valuable asset in your estate it is important to realize that failure to address these challenges could result in the tax man getting a significant chunk of your value instead of your heirs.

Another issue that needs to be addressed is what happens if the owner becomes disabled or incompetent? An effective succession and transition plan now becomes worth its weight in gold. Stuff can happen so it makes good sense to be prepared.

I think that if business owners haven’t done this work they should make a New Year’s resolution to begin this important planning work and get someone to help guide them through the process. For any CPAs reading this post, I would bet that you have clients that fit this profile. If you are not confident in your ability to guide clients through this process go locate another CPA who has experience and specializes in doing this work. Your client will thank you.

Well, I have rambled enough for one day but I hope you understand the urgency of this challenge. We’ll share some additional questions and situations in future posts together with thoughts on the process we use to guide clients as they plan their transition.

Customer Value

In todays economy it critical to preserve customer value. The key is earning and keeping customer trust. Understand that your business creates or destroys customer value with every decision it makes and every action it takes. Every customer contact and interaction is vital. There is a good chance that customer value is either created or destroyed based on some action taken by someone in your organization.We know someone who recently had some work done on their house and the quality of the product installed was poor. They needed resolution to the issues. The communication from the company was as if they didn’t exist and didn’t matter. Their recourse was to withhold an amount in an attempt to get some resolution to their issues and concerns. In response, the company sent a notice of an attempt to file a mechanic’s lien. The salesman who sold the product knew of the pending action and never called in an attempt to settle the matter.

These people were justifiably upset. The president of the company ultimately apologized, but by then the damage was done. The amazing thing is the company could have gotten paid on time if they had done things right in the first place and listened to the customer. The president instituted the new collection policy to accelerate cash flow when he should have taken more time to make sure his people were listening to customers and taking care of their concerns.

It is important to realize that customers are no longer just connected to companies in business transactions. They are strongly linked and connected to other customers. Customers talk to other customers. You can no longer manage your business on a customer by customer basis. The actions described above will severely damage the company’s future business. This is a perfect example of burning customer trust and throwing it out the window.

Every customer represents potential future cash flows. Your future revenue is linked to how potential customers will behave. Each customer has a life time value which you can translate into the net present value of all future cash flow attributable to each customer. This can be further extended to the contacts of these customers. Customers represent your most critical asset and resource which are essential to the survival of your business. When there are only so many customers you can’t upset them. When you drive customers away you end up destroying the life blood and long-term value of your business.

Complacency

I thought it would be useful in this troubling economic environment to explore complacency. Linked together with complacency is a false sense of urgency. These are the two biggest issues that I wrestle with in my consulting practice and in dealing with clients.Complacency emerges from a sense of success or perceived success. Hey, I know what I’m doing because I built this successful business. The wagons might be circled and the bank has shut me down, but I know what I’m doing. Perception might be nine tenths of the law, but here reality is a different story.

Then the urgency level starts to spike. The trouble is this is a false sense of urgency because the complacent paradigm has these people doing the same things they’ve always done except they’re doing it faster. All they are doing is digging the hole deeper when they should stop digging.

I try to invoke the unvarnished truth and get them out from under the covers and feel how cold it really is out there. Maybe it is time to slow down and really think through the business and what we need to do going forward versus the same old things that aren’t going to work anymore. We need to change.

This is the challenge for CPAs in today’s economic reality. Stop doing what we have always been doing and start dispensing real business advice to our clients. It is going to be tougher and it’s likely that the same products and services won’t get the job done. It’s time for innovation to kick in and start thinking different about what to change and how to change.

Making It Happen

Here are seven simple management concepts that will help keep you on track and get things done. I thought it was appropriate as we get ready to celebrate another Thanksgiving.The seven steps are:
1. Know your people.
2. Insist on realism.
3. Set clear goals and priorities.
4. Follow through.
5. Reward people who get the job done.
6. Expand people’s capabilities.
7. Know yourself.

Have a great holiday, rest, and recharge your batteries so you’ll be ready to look for new opportunities behind those rocks of resistance.

Work Simplification

In these days of uncertainty and tough economic conditions it is critical to take all the necessary steps to keep costs under control. Usually the first step most companies take is to wield a big sharp axe and cut their payroll, often without thought or consideration. I have a better approach. How about work simplification.

Here’s how it works. Gather each supervisor and employee and have them challenge every detail of their jobs. Here are a list of questions they should ask:

• What is its purpose?
• Why is it necessary?
• Where should it be done?
• When should it get done?
• Who should do it?
• How should it be done to get better results?

This is a simple process that can pay big dividends. It will also give you good feedback on which supervisors and which employees are really thinking. Give it a try and my guess is that it will pay dividends.

In the long run it might be a sharper tool than the unwieldly axe.

Evaluating Current Reality

I was working on my BBV Program and thought it might be good to share some thoughts and even some questions to ask. Evaluating performance on a regular basis is critical. The key is asking the right questions before taking corrective action in the wrong direction.

There are three categories of conditions to consider. These conditions include:

1. A Business Tune-up
2. Turnaround situation
3. Are you in a crisis?

Tune-up questions should include the following:

1. Have earnings deteriorated?
2. Are sales leveling off or declining?
3. Is your workforce less inspired?
4. Are you satisfied with recent product or service introductions?
5. Have you developed a plan to maintain your rate of growth in spite of new competitors entering the market?

Now let’s review some turnaround questions:

1. Are you starting to lose money after years of profitability?
2. Do you have too much inventory that’s not moving?
3. Are you able to recruit new employees?
4. Do you have too much debt and not enough equity?
5. Do you know where you are making your profit?
6. Do you know why you sell the products in the markets you are in?
7. Have competitors taken business away from you?

Now for some crisis questions:

1. Is making payroll a problem?
2. Will your bank lend you more money?
3. Have you lost any key employees?
4. Have any vendors stopped shipping goods to you?
5. Have you had time to think about strategy?
6. Have customers who are slow pays stopped ordering?

Based on the answers to the above questions you will gain a sense of what action you might need to implement. These questions are the first steps of our Building Business Value methodology. From here we establish the scope of corrective steps a business will need and how to re-orient the business. In these times of uncertain economic conditions we thought these questions were appropriate. Asking the right questions is usually the first step in solving the problem. Don’t panic and take measured action to address the current reality of your business.

Future Thoughts and Action

I am having fun writing the new blog and wonder why it didn’t get started sooner. That being said I thought it would be good to let you know where we are going and what we have planned as we get this new web site moving down the road. I will also be developing a bi-monthly newsletter so be sure and sign up to receive it.

I wanted you to know that we are in the process of formalizing all of the BBV tools and work templates so you will have access to these tools to deal with the economic crisis. In the meantime just contact me and ask about any area where you need help or have questions. I have the capability to provide on-line virtual consulting support and training. So if you need or want assistance before I formally complete manuals or training programs, I can still help you using these virtual tools. I can also provide on-line training so you get get access to me, my materials and training just by asking.

In the future I will be providing formal training programs on how to deliver consulting services, conducting operational and strategic assessments, and other services. I will also be developing and offering an accounting and financial basics training program for business owners. In addition I will offer sessions on strategic planning, budgeting, SWOT assessments and how to survive the economic meltdown.

I have been teaching internet courses for some time and decided that this capability would be a good addition to the written material provided in my books, toolkits, and checklists. I can actually interface and communicate with you to respond immediately to your questions and provide PowerPoint presentations so you will receive real time instructional support. You can also receive consulting support and coaching over the internet. All we have to do is schedule a session, provide you with the proper instructions and you will be good to go. I encourage you to contact me via phone or e-mail to take advantage of this support.