Tuesday, August 7, 2007

Five Steps for Creating A Business-Exit Strategy

From The Wall Street Journal Online

Nancy Sharp, chief executive of Food for Thought Enterprises, found herself scrambling to make some tough decisions in 2001 after her husband, then president, was diagnosed with lung cancer and couldn't run the family business day to day.

"We started to be written off a bit," says Ms. Sharp. Potential customers thought, "The owner is sick, and the wife is tending to him -- they're not going to be there when we need them to be."

Ms. Sharp says she made some rash decisions, including hiring a new president from outside the Lincolnwood, Ill.-based event and food-service company. That person didn't fit well in the new role and left within 18 months. Luckily, Ms. Sharp understood the now-320-employee business enough to keep it growing past her husband's death in 2004. But she's now building a succession plan so her successor isn't left in the same bind.

Business owners often feel that they -- and the business -- will always be around. But without some thoughtful planning about succession, it's common that businesses wither when the owner passes away or leaves.

Here, then, are four steps to making sure your business lives beyond you.

Communicate. The first step of succession planning is figuring out what you want to happen to the business after you're gone -- whether that's tomorrow or 25 years away. The goal may be selling the business. Or you might appoint a family member or trustworthy employee to take over.

But such decisions can't be made in a vacuum, says David Paradise, president of the Family Business Resource Center in Newton Centre, Mass. Accountants, lawyers and financial advisers can counsel you on the various aspects of succession planning. But more importantly, owners need to engage their most-promising employees and family in a dialogue about the future of the business, asking sometimes personal questions to gauge their thoughts and goals.

Once your goals for the business are clear, you can better lay out a long-term plan. Most succession plans look five years out and include incremental steps for achieving the ultimate goal of how ownership or leadership will be transferred. But you also need a short-term contingency plan, in case disaster strikes tomorrow, Mr. Paradise says.

Succession plans tend to evolve over time. So owners should be revising them at least once every few years as time passes and circumstances change.

Detach yourself. Many businesses rely too much on the founder's persona. So if the founder dies, there's high risk the business will, too.

To avoid this, you should start documenting all procedures and policies and writing down how the business operates in vast detail so that "if I get hit by a bus, theoretically, my staff can walk in and they can follow the steps," says Raman Chadha, executive director of the Coleman Entrepreneurship Center at DePaul University in Chicago. Mr. Chadha estimates that fewer than 15% of entrepreneurs he meets have a succession plan.

You should keep a copy of the document in a safe place, and have at least one trustworthy employee who knows where to find it and has the competency to run the business after you're gone. That person should also know the key customers, suppliers and employees so it's not such a shock if he or she has to take over the business on short notice.

Groom your successor -- early. One of the most important facets of succession planning is deciding who the next leader will be, and spending ample time -- preferably years -- grooming that person for the role. Who that person is shouldn't be a quick or emotional decision. It should be handled thoughtfully and formally -- even when you're dealing with family, says Mr. Paradise.

First, determine what leadership qualities and skills you want in the next leader. Then identify qualified candidates using that criteria, and talk with them about their interest in running the business. Devising an evaluation process and setting goals for the candidates can make it easier over time to choose the best one. You might allow candidates to lead projects so you can evaluate how they perform as leaders and engage with employees and customers.

Sometimes the best candidate must be recruited from outside the business. Bob Hirsch, co-owner of Gold Eagle Co., a family-owned automotive chemicals manufacturer, hoped to keep his Chicago business privately owned and in the family. But none of his children showed much interest in running the business and there was no employee deemed qualified to take it over.

So in 1993, Mr. Hirsch invited his son-in-law, Marc Blackman, to join the business. Mr. Blackman was first given a job in sales. Over the years, he was moved into roles with more and more responsibility. He became CEO in May, when the 73-year-old Mr. Hirsch stepped down. Mr. Hirsch still works as an adviser for the business, though he admits not being the decision maker any more "can be hard at times."

Some business owners even undertake an extensive external search. Ms. Sharp of Food for Thought estimates she's interviewed several dozen candidates in recent months to fill three senior positions. She hopes to choose the next chief executive in the next five years and then spend the following few years training him or her before she retires.

Get financial protections. Many financial planners say there are key ways owners can protect the business in case of their death or disability or from future disputes.

Having adequate life insurance to pay estate taxes in the event of your death can prevent others having to sell the business. So-called "key man" insurance can also help keep the business afloat if key employees become disabled or die.

David Ciambella, a succession planner with Rawls Group, a family-business consulting firm in Orlando, Fla., says owners should have wills and trusts that clearly outline who receives what, along with a health directive and power of attorney that appoints people to make key health and business decisions if the owner becomes unable to.

A buy-sell agreement can lay out guidelines for how ownership of the business will be handled in the future. It makes it easy for future owners who want to sell their shares and lays out how the business will be valued at any moment in time. It also makes it easier for owners to make sure the business stays in the family.

Email your comments to kelly.spors@wsj.com.

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