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For 11 years XYZ Construction was a thriving contracting business. Its owner had built it from scratch and as a one-man powerhouse he managed with a tight rein, sharing little information with either his son, who had his own business or his accountant.
Through dint of long hours and hard effort, he built XYZ into a $4 million a year company, employing 25 people. In 2004, he even expanded XYZ into landscaping, offering clients snow plowing, property management and lawn maintenance services. Banks were only too happy to lend him money. Better yet, XYZ was profitable; the owner could count on a 5% return every year before income taxes.
Then in just three short months, XYZ went from boom to bust. In October, 2005, the owner passed away and by January the company's bank was returning cheques. The owner, despite urging from his family, accountant and even his bankers, had failed to even start planning for the future, especially in the area of succession.
"Sadly XYZ's story is all too common," says Bruce McConnell, Vice President of Consulting at BDC. BDC's was one of XYZ's bankers.
The death of the owner triggered a rapid downward spiral in XYZ's fortune. Key employees quickly left, many taking existing business with them. Outstanding loan balances of over $200,000 went unpaid. Obligations to various government agencies quickly mounted. At one point the Canada Revenue Agency even issued a Requirement to Pay Notice against one of XYZ's larger customers.
Because the owner never delegated or discussed the business in detail, his son was at sea when it came to understanding the business or keeping it afloat. Not even XYZ's accountant had a full picture. The company, once thriving, quickly slid into receivership and with it went a considerable family asset.
"XYZ should be an object lesson for thousands of small and medium-sized businesses," says Mr. McConnell. "The sad truth is that many if not most have not spent the time and effort to do effective planning for the future of the business, especially in the area of succession.
"It proves the old adage: failing to plan is planning to fail. In the case of XYZ, a multi-million a year, thriving business lost almost its entire value in a matter of months because of that simple failure." |
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When it comes to business transition, success is about focusing on stakeholders' interests, says Bruce McConnell, Vice President of Consulting at BDC.
"Our approach clearly distinguishes between the needs of the business owner and the long-term needs of the business itself which allows us to optimize both," says Mr. McConnell. "That change in approach can greatly reduce the emotional content."
Focusing on the business means creating an overall plan for the future of the company, its growth, developing its management, expanding into new markets and products. Business transition becomes just one element in a multi-faceted program, he says.
"Bottom line, succession is always about the future of the business anyway."
Reducing the emotional intensity is the very first step towards effective succession planning, says Debby Stern, a partner at Soberman LLP, a Toronto accounting firm.
"The entrepreneur should express his or her needs in positive, business terms – and that is almost always future growth of the business," she says. "Succession should be reduced to just one part of the plan."
Like creating lasting wealth, planning for growth including succession takes time, says Mr. McConnell. The time an owner is willing to devote determines the business' future.
"If he or she is only willing to devote six months then by necessity the future will be a simple transaction, most likely a quick sale to a third party," he says.
If, however, the owner is willing to spend three to five years creating a well-thought-out, detailed growth plan then the value of the business can be maximized.
"And that should be the ultimate object," says Mr. McConnell. "Business transition should be about maximizing values for all parties involved.
BDC's process begins with a decision about time commitment and then consultants help identify and analyze the various options that this time frame allows. Other professionals share the same formula.
"We use the time to identify pain points," says Shelagh Rinald, a tax partner in the Victoria office of Grant Thornton LLP. "These are issues that have to be addressed because they may be impediments to any transfer of ownership, whether to family members, management or third parties."
According to Mr. McConnell, entrepreneurs looking to pass on the torch will have to look at things such as inventory levels, market share and growth, strength of management, opportunities to improve the supply chain or distribution network, productivity levels and predictable market trends.
"The deeper we go, the more accurate the overall picture of the company becomes," says Mr. McConnell. "We can then use that hard information to create strategies to remove downsides and improve upside potential."
An essential part of planning must be alternatives, options to follow in case life intervenes, as it often does. The creation of a plan does not set things in stone, he points out. There must be reasonable options in case circumstances change.
A three to five year planning period also allows time for the owner to make the difficult transition from hands-on-operator to a manager comfortable with delegating decision making to others.
The owner/operator can slowly move to the role of chairman, which may also bring an added benefit: time to focus on specific areas of future growth such as acquisitions or exports instead of day-to-day operations.
"The goal is to grow the business, to maximize its value and growing from a $2 million a year venture to $10 million or $10 million to $30 million demands new management skills," states Mr. McConnell. "Gaining those skills needs both a plan and the time to make those changes.
Written growth plans may also bring other advantages, says Ms. Stern. She sees banks increasingly seeking succession plans as a condition for major financing. Formal plans bring comfort to lenders and investors alike.
They can also bring comfort to the owner/operator's family, providing a clear idea of the future and what will happen should a life changing event take place.
"We often tell clients to look on part of the process as creating a will for the business," says Ms. Stern.
"What it comes down to is simple, sound management," says Mr. McConnell. "If you have an asset, any kind of asset, your goal should be to maximize its value for the benefit of all stakeholders. That is what the process is all about."
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