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Five Steps To A Successful Replacement Plan

Print Business Owners Don’t Want To Think About It But When The Time Comes To Retire You Got To Have It

Paul V. Reilly ,

“Everybody talks about it, but nobody does it” was a commonly used description during my high school days concerning the exploits of young men and women.

Although there may be some disagreement on the state of these activities in high schools today, this statement has never been more correct about succession planning in the printing industry.

In fact, this is the case in most family-owned businesses. A recent PricewaterhouseCoopers survey of CEOs of privately held firms ranging in size from $5 million to $150 million concluded:

* 22% have done a great deal of succession planning

* 26% have done some to very little succession planning

* 24% have done very little succession planning

* 19% have done virtually no succession planning

I believe the reason why succession planning is not prevalent among small businesses is that it is difficult! Besides the emotional implications, succession planning is time consuming. It is a multiyear process, and its path is uncertain.

Still, the lack of planning is surprising when you consider that transferring leadership and ownership to family, employees, or others is considered the “Great American Dream” to many.

The need for succession planning has never been greater. A recent Kiplinger Report stated: “Expect a glut of firms to go up for sale as thousands of baby boomers retire. With about 8,000 Americans turning 60 every day, more and more business owners are thinking about retiring ... an estimated 750,000 companies owned by boomers— one in every six—will be looking for buyers, up fifteen-fold from 2001.”

In this article, I will further define succession planning and lay out an easy, step-by-step plan to assist in its successful execution.

Succession Planning

Succession planning has two parts:

Replacement planning. The process of identifying the candidates and replacing the owner as the leader of the firm.

Exit planning. The process of identifying the options and replacing the owner as a shareholder of the firm. Many people may ask, “If I am going to sell the business, why do we need to identify a person who will replace me?” In some cases, this ultimately is a valid point.  However, before you start the process, you do not know whether having a replacement will impact you negatively or not.

I strongly recommend putting a replacement in place before you commence exit planning. There are many reasons: for example, you may decide to retain ownership, or selling never turns out to be an option. In these cases, having a replacement leader increases your options and strengthens your negotiating position.

But the most important reason to complete replacement planning before exit planning is that your company is worth more with a new leader in place.

Any knowledgeable buyer of a printing firm understands that the CEO highly influences the success of the firm. If a seller’s objective is to exit everyday management, a buyer must factor in the possibility that the company could be less successful under new leadership. This reduces the price to the extent that the buyer perceives the situation as a risk.

The risk is removed, however, if a new leader has been appointed and the firm has continued to operate as before. Some buyers discount such risks, but not all buyers do.

In fact, when I was actively purchasing printing companies, we would not purchase a firm whose current leader was not prepared to stay at least two years after the sale. This was a lesson learned only after allowing two sellers to leave and watching post-acquisition profits shrink dramatically.

The replacement process should start at least two years prior to a planned exit.

If you opt not to name a replacement, then you must be prepared to stay on two years after the sale. You most likely will carry out a replacement process with the new owners during this period.

Five Steps to a Successful Replacement Plan

1- Identify key leadership criteria. Objectively determine what leadership skills are required in the person who will replace you. These skills may be different from yours. They should represent what you believe are the most crucially needed leadership abilities for the next three to five years. Attempting to predict needs past this horizon in an industry as dynamic as the printing industry is futile.

2- Find future leaders and motivate them. Identify those within your organization who currently possess or could, with training, develop the required leadership skills. If these leaders are not found within the organization, look outside.

3- Create a sense of responsibility within the organization. Communicate what your replacement plans are. Your people will figure them out anyway. Challenge the organization to successfully transition to new leadership.

4- Align succession planning with the corporate culture. You know how and why your organization works or doesn’t work. Use the replacement process to reinforce your culture or modify it as required.

5- Measure results and reinforce desired behavior. Set quantifiable goals to measure during the process. The passage of time cannot be the only indication that your firm is now ready for your replacement.

Exit Planning

To successfully execute an exit plan that replaces an owner as a shareholder, follow these six steps:

1- Set owner objectives. When counseling a prospective seller, I ask two questions: Do you know what you are going to do after the sale? Do you have the resources to do what you aspire to do after the sale? If the seller does not have a positive answer to both of these questions, then I recommend not starting the exit plan until they do.

2- Identify business and personal resources. In answering the second question, sellers must look at resources both outside and within the firm. Adjustments need to be made if these resources are inadequate to meet the seller’s post-exit needs. Perhaps the sale should be postponed until the firm is worth more, or post-sale aspirations should be altered. Owners should be realistic about the potential future value of their firms. In my experience, many more owners have fallen short of value growth expectations than have met or exceeded value growth expectations.

3- Maximize and protect business value. Deciding how to run your business just before or during exit planning is daunting. The overriding principle is to run the business as you always have and as if you were going to own the business for five more years. The one exception is making significant capital investments. A printing business loses value the first day it installs a new large piece of equipment or adopts new technology. It’s similar to losing value in your new car as soon as you drive it away from the showroom, but even worse. Since it either reduces cash or adds to debt, the cost of purchasing the equipment or technology is a dollar-for-dollar reduction in value.

Most buyers—and almost all buyers’ lenders—don’t credit value for such projects until their benefits are realized in the firm’s income statement. Accordingly, sellers should time their exit plans late in their capital investment cycles, preferably after benefits are fully realized in income statements.

4- Evaluate ownership transfers to third parties and/or insiders. The options are varied, and each has different benefits and risks. The seller can choose among family members, management, employees (via ESOPs—Employee Stock Ownership Plans), competitors, or private equity firms. I strongly recommend that prospective sellers engage professionals skilled in mergers and acquisitions to assist in evaluating these options.  Here, one size does not fit all. Most owners sell a business only once, and to do it right, they should seek the assistance of professionals who do it for a living.

5- Ensure business continuity. The replacement plan and the exit plan are executed over several years. Fatigue and longing for the next phase of your life can take a toll. Stay in the game! Ensure that your firm has the benefit of your leadership until the very end.

6- Complete personal wealth and estate planning. Years before you contemplate an exit, hire competent tax and wealth advisors. At the end of the day, how much you take home after taxes is more important than the sale price of your business. The structure of the transaction, coupled with the way you have structured your ownership of the business, may be the difference between having and not having adequate resources for your post-sale aspirations. Succession planning is a natural process in the evolution of any business. Years of attention and the owner’s leadership talents are required for its successful execution. The steps for replacement planning and exit planning outlined above are a road map for that execution. Here, in summary, is the most important advice I can offer for realizing what is to many the culmination of the Great American Dream:

* Start early—four to five years before the anticipated exit.

* Hire a replacement CEO, or be prepared to work for two years with new owners.

* Time exit plans late in equipment and technology investment cycles so that benefits are reflected in an income statement.

* Hire experienced advisors to assist in tax planning and the sale process.

Reprinted with permission from the 2011 Forecast, Part 1, Trends & Tactics. Copyright 2011 by the Printing Industries of America (www.printing.org)

All rights reserved.

Paul V. Reilly

Paul V. Reilly

Mr. Reilly formed New Direction Partners in April 2009, an investment banking and financial advisory services, with Peter Schaefer, Jim Russell and Tom Williams to serve the printing and related industries.

Services include merger advisory services through the representation of selling shareholders as well as buy side representation, valuation services, financing and refinancing efforts, turnaround and restructuring services, and temporary/interim management consulting.

Mr. Reilly has been providing investment banking and financial advisory for over four years and engagements have included packaging, label, commercial printing, direct mail, web-to-print, digital printing, envelope manufacturing and graphic art supplier clients.

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