Succession Planning

Are you ready to pass the baton?

How much time have you spent recently preparing your organization for the future with a succession plan?

Too often I have spoken with owners of business who have given no thought to how their business continues past their time or even who should be in line for succeeding others in key positions.

There is a fine line between structuring an organization so strong back up is available for all key positions and being top heavy with management staff. While it is important to develop and maintain an organization chart that identifies potential replacements for key positions it is a plan that must be kept confidential among only a few very senior managers. Clearly if the succession plan was broadly know the group of subordinates would constantly be chafing at the bit to move up the ladder.

The succession plan should be updated regularly. Performance of employees change, new stars arise and training of key individuals to broaden their experience becomes important elements of the plan to maintain.

In small family organization succession plan may be even more important. The owner may have family members who he would wish to carry on the business but are they qualified? Are there competing siblings who vie for the role of president and how does the current owner resolve that issue?

A well-developed plan not only provides for a smooth transition when needed but also can be a critical tool in situations that result from an untimely injury, illness, or death of the owner. You do not want a vacuum created from the absence, for any length of time, of leadership in the business. A prolonged absence of an identified leader can destabilize the business and lead to losses and in extreme situation lead to the collapse of the business.

The owner or president of the business has the fiduciary responsibility to be proactive and protect the business and ensure survival is optimized. That means an active role in preparing for his/her exit and change in other key management positions.

You never know when there will be a need to pass the baton.

Management Incentives

Keeping key management personnel.

There is a key role for incentives in managing and retaining key executives for the company. Here are some reasons for and examples of how to structure effective incentive programs for management.

1.     You want to retain key management personnel for a number of reasons. High turnover destabilizes the company and can have severe effects on moral of employees and the bottom line.

2.     You want to retain high performing managers to enhance your own company’s growth potential and to keep key people from wanting to look at other opportunities.

3.     Good managers don’t expect a bonus without achievement but don’t set the bar so high as to be unachievable. That becomes a disincentive to achieve.

4.     Set goals that help improve your bottom line; just achieving new sales records is not a priority if the costs exceed the benefit. Sales executives should be just as concerned about profitable sales as the CFO.

5.     Pay executives for overachieving by sharing profits. As profits goals are exceeded rewards can continue to be major incentives if shared fairly. Reward contribution.

6.     You don’t have to give everything away in this process. Be competitive but unique and allow key employees to participate in goal setting. When they are part of setting the goals they are more likely to increase efforts to reach the bar.

7.     Conduct periodic reviews to ensure all incentive participants know where they stand. Let’s not have surprise results announced at year end….good or bad.

8.     Be completely transparent. If goals are profit based show actual revenue/profit results so that there is a clear understanding of achievements.

9.     Roll plans forward and allow incremental bonuses for achievements in consecutive years. That’s a great way to keep a key person from leaving; that extra bonus for additional achievement may be too juicy to walk away from.

10.  Stock options are often used as a tool for key employee retention. The chance to be a part of ownership can be major motivator. However recent issues in corporate governance have tended to dilute and weaken some incentives. Try to strive for balance without risking responsibilities to shareholders.

Incentives are important tool to maintain a motivated and dedicated management team and a well-designed plan can bear fruit over the long term 

Maximize Business Value

Tips for Maximizing Business Value

Burying excessive personal expenses in the business financials can lower business value!

The most popular method of valuing a business uses a multiple of earnings over a period of years. Business owners should be aware of that while attempting to reduce the bottom line with personal expenses to minimize taxes.  Though there are a number of deductions that may be added back to determine true ash flow, not all add-backs are considered legitimate by buyers or lenders.  Being too aggressive in minimizing taxes today may cost a business owner big dollars at closing.

Some businesses may need a whole new direction!

Unfortunately, there are businesses whose market has changed so drastically that their products or services how have limited demand.  And it might not be the slow economy!  Those business owners may have to consider a whole new business model and get into the research and creative thinking mode.  A good starting point is searching ideas on the internet.

“You can’t always get what you want”

The title to the 1969 song by the Rolling Stones seems to echo what the market is telling many business owners these days.  There is no question that prices for many businesses are down and for various reasons.  But if there are offers on the table a business owner must take a hard look and be realistic as to what has to change, the business or the economy for the price to “sing along” with expectations.

Leases can make or break the sale of a business

The lease terms of the business space can be a major consideration for a buyer.  For example, a retail business with a long term lease on a good location can be attractive.  But a long term lease on a business needing more space to grow could be a detriment.  Or there can be concerns for an expiring lease when the landlord might demand a large increase.  When it comes to negotiating a new lease, business owners must carefully think through the timing of their plans for exiting their business.

These tips are courtesy of Bill Sivell, VR Windsor. Please contact him for additional information on how to amximize the value of your business. www.vrwindsor.com

  

Crisis Management

Struggling to deal with a crisis management plan?

 Is your organization struggling to deal with a crisis or plans to ensure the business exposure to a crisis is minimized?  It is not uncommon to see this paralysis because managers often prefer not to deal with the situation.

Let’s look at some steps that can be taken to help build a safety net.

1.     Maintain sensitivity for even minor or seemingly insignificant events. Some could have the potential to develop into major issues that could be a blow to the business.

2.     Plan ahead with a look to long term strategies as a guide. Work out best and worst case scenarios to help prepare for unseen events.

3.     If a crisis arises act quickly; procrastinating rarely improves the situation.

4.     Create a crisis management team with a mandate to trouble shoot, identify potential problems and empower them to recommend and enact changes to protect the business.

5.     Provide strong and effective training to key employees and take steps to eliminate small issues so they don’t erupt into major problems.

6.     Explore optional solutions and look for new ground to operate from if standard solutions prove inadequate. Think outside the box for solutions.

7.     Don’t panic in a crisis situation. As the leader employees want strength. Keeping a cool head may facilitate focussing on the issues and getting a solution right.

The key to avoiding or minimizing the impact of crises that may arise is to be proactive ahead of adversity. I hope these tips provide insight into ways to fight through any situation that may arise with minimal damage to your business.

Business Value

Do you know what the business is worth?

Corporate valuation is not a perfect science.  Indeed, value is perception.  Nevertheless, valuation exercises are done with the objective of maximizing the growth of shareholder wealth. 

One of the benefits of corporate valuation exercises is to determine how best to raise capital.  The best financial solution is one that minimizes the cost of capital or increases the value of equity.  By conducting valuation exercises, you would be better able to provide clients with advice on capital and business structures and, of course, provide the ensuing financial structure for expansion purposes, mergers, acquisitions, divestitures and restructuring.  For private companies, valuation exercises are also important for estate and tax planning.

While a valuation exercise may help in determining what the best financial strategy to adopt is, it will only give an indication of what the value of the company is given the economic, financial and market conditions at that point in time.  For a publicly traded company, the value of equity is also dependent on several factors, including but not limited to, the liquidity of the stock, the control structure and who the target buyer is.  For a private company, other factors will include family employment, additional benefits, the control over the bonus and dividend policy and the mix of asset ownership. 

There are several valuation methods.  Asset valuation is a good starting point beginning with book value and then moving on to replacement value, market value and liquidation value.  Assessing the market value of the company as a whole requires access to market data bases whereby a complete comparison of similar companies is done through ratio analysis and industry rules of thumb.  The most straight forward, effective and efficient method is the Discounted Cash Flow (DCF) method whereby the present value of future cash flows is calculated.

The DCF method uncovers the intrinsic value of companies, particularly in the case of highly cyclical situations, avoids the issues of interest rate environment because the rates used in the model are long term rates, and provides a risk adjusted appraisal as it uses expected rates of return.  In short, it is a sound quantitative method on which to base discussions around financial strategic planning.

The bottom line… know your bottom line and what your business is worth. Fiscal planning will be a lot stronger.

When is the right time to go?

One of the more interesting and challenging questions I run into when providing consulting support is “when should I be thinking about exiting this business? There are many factors to be considered but here are a few thoughts.

What kind of shape is the business in today? Is the business operated from strong principles of strategy with a clear vision? Can that vision be expressed and understood by those who manage the business or potential buyers? If you the owner cannot clearly state the purpose or reasons that you exist don’t expect new owners to invent it for you.

How will you get the maximum return if you plan to sell? In cases where management/ownership is dominated by a single individual it is important to maintain a high degree of confidentiality so that employees do not become insecure and unsure of the stability of the company or their jobs. This instability can easily be communicated to a potential new buyer and create a poor impression.

Factors that may support your decision to leave can grow out of many conditions. The most common is an age derivative. A long career leading to a desire for more personal time; reap the rewards of your career. Age may not be the prime driver but longevity at the job could be creating burn out. Time to move on.

Another good time chosen is driven by a need for change. You may feel you have achieved all that can be achieved and you wish to quit while on top of the game. This may also provide a high rate of return if the business is at a high level of performance. Selling now may produce the equity needed to finance a new opportunity.

Look for opportunities to exit from positions of strength. A well trained and competent management group may provide the opportunity to offer your staff a management buyout.  Managers may be able to pool resources to fund the buyout, you as owner may offer to finance all or part of the buyout or there may be an option to use company assets to finance the loans needed for the buyout. This is often referred to as a LMBO – Leveraged Management Buy Out. It also provides good opportunities for maintaining stability in the organization.

Finally, the marketplace may facilitate determining the right time to exit. Poor economic conditions or competitive activity can have a huge impact on if or when you should exit. Positive conditions too might bring a competitor to the door with a buyout offer.

So the options are many but not always easy to sort through. Timing is critical, business life changes,  choose wisely.

– Are you stuck in a pressure cooker?

In need of tips to reduce the stress you are under?

You may want to consider some of the following options in order to lessen the impact or negative effects may have on your business operations:

-        Know your body signals; excessive heart rates, headaches, anxiety may be signals and suggest a need to find time to wind down.

-        Don’t procrastinate and postpone decision making. Difficult decisions are not made easier because you postpone them. At times conditions may worsen if issues are not resolved.

-        Without really ducking a decision, stress can be relieved if you just take a short break or switch tasks for change of perspective.

-        Stay fit. A program of regular exercise can help your body and mind deal with difficult situations that may arise from time to time. Try to maintain a healthy diet to support your overall health.

-        Achieve balance between work and other family and personal activities. Enjoy time away from the job to let you recharge your batteries. Plan periodic vacations or days off. The organization is unlikely to collapse because the boss is away for a short time.

-        Delegate responsibility. No one has a monopoly on all of the good ideas and ways to resolve problems. Let staff participate as part of team that enjoys successes and faces difficulties on the job as well.

-        Use networks within and outside of the business to share ideas and issues with. Trust people to help with business issues. Working in isolation is rarely a good idea.

-        It’s nice to want and demand high standards but an obsession with perfection can destroy a business and the people that surround you.

-        Make sure key support people including those managing the  finances keep you up to date. Since cash flow is a key marker make sure expenses are kept under control and systems to improve productivity are reviewed often. A well run business with good information flow is a key to stress reduction. Eliminate surprises.

These suggestions won’t eliminate all of the stress in your business but I find they help keep stress at a manageable level.