Make Succession Strategy a Priority

October 15, 2014

What to say when investors come calling

Before you agree to meet with investment bankers or a private equity firm when they come calling, first make it a priority to develop a succession strategy.

Sure, it’s exciting to get calls from investment bankers. It’s a boost to your ego when private equity firms and even brokers express interest in investing in your business. It’s fine to have them in your office while getting to know their niche and how they might help you expand your business. You like that they promise to leave all management decisions to you and simply be available for advice when needed.

Many owners often ask for my advice, not because discussions with these investors are complex or confusing, but because owners want to make sure they can strategically align with the right investor(s) and create a win-win situation for their family, customers, and employees.

Having a succession strategy in place first can help you know what type of investor is the best fit to help you achieve your goals. More importantly, it provides a road map to help you stay focused and continue to meet goals for all stakeholders. (Your stakeholders include you, your family, customers, employees, suppliers, potential investors, advisors, etc.)

Know what—and who—has to come first

Jack’s business was growing, so he decided they should create an incentive plan for their key management team. In 2013, Twitter’s IPO officially created a public market for the social media platform company. Once public, anyone could own a portion of Twitter. It became publicly owned, and Twitter made its shares publicly available. In Jack’s case, his employees or key management team would become part owners of his company. Unlike Twitter, Jack created a private market for his own business.

Thinking in terms of bonuses, retention, stock options, etc., Jack felt he had all the right people to advise him on how to incentivize employees. They believed strongly that an incentive plan would allow them to empower the employees to help the company grow.

Jack’s accounting team had forecasted the number of shares, price of stocks, and carved out a portion of that to predict how the stock would move from point A to point B. They used EBIDTA (Earning Before Interest, Depreciation, Tax, and Amortization) as a key metric to predict how and which employees would get a percentage of the company.

However, there were four remaining questions with this plan:

1. How much was Jack’s company worth?

Jack failed to engage a certified valuation company to help determine his company’s worth. A valuation company works like a home appraisal company to help owners determine what their company is worth if sold in the open market. They compare your business to other companies in your industry. This gives the owner much more insight about his or her company’s marketability. Without this determination of value, how could Jack know how much his company’s stock was worth?

2. Who are the right people to design and implement the plan?

Jack’s CPA, attorney, and auditor indicated their approval of the plan. But none of these people actually helped design the plan. It was all in Jack’s head, and his controller put together some numbers. Based on their limited involvement, the incentive plan looked fine and seemed legal and fair. But their expertise was not considered when determining how to help the key management team meet Jack’s high growth plan.

3. What is EBITDA and how can the key management team grow that number?

Evelyn, the operations director, did not understand the incentive. Evelyn told me that none of the key management team understood EBITDA and how they could contribute to EBITDA. On top of that, she did not understand how the stock options worked. Jack did not engage the right specialists to communicate the incentive plan. The key management team was convinced they would never see anything from the plan, and they felt alienated. They were right. Four years went by, and every year they reviewed the EBITDA. Evelyn told me the annual meeting was a joke. None of the key management team understood anything, and they could not see the point of the incentive plan.

4. What was Jack’s overall succession strategy or plan?

Jack should have started his succession strategy before committing to any incentive stock appreciation plan. After his failed attempt, Jack asked me to review the entire incentive plan. Instead, I asked Jack to start developing his succession strategy. After several sessions, Jack realized he really wanted to sell to a third party. The question then became: How could Jack sell to a third party and still provide the incentive plan for his key management team?

There are so many ways owners like Jack can accomplish their goals through a proper succession strategy and implementation plan. Sometimes a tactical tool, such as creating an incentive stock appreciation plan, sounds nice. However, tactical tools only work as part of the overall succession strategy.

What happened to Jack? Well, after a succession strategy was developed, my team and I helped him implement it over a period of time. The growth plan was co-created with the key management team. The team set their own metrics, not based on a lagging indicator such as EBITDA, but instead based on leading indicators such as 10% organic sales growth from the existing top 20% customers. The team also recommended a cash bonus plan that Jack agreed to. We then helped develop a three-tier scenario along with their leading indicators. Each tier had a different range of incentives.

That being said, using equity to finance your business or third-party selling is only one of twenty-seven strategies for succession planning. You, the owner, can be equitably compensated for your business if you strategically align the selling methods with your goals. There are two major transfer channels: Internal and External.

Internal channels include transfers to:

•    Partners/ Co-owners

•    Employees

•    Family members

•    Charitable trusts

External channels include:

•    Retirement/Leaving the business

•    Public offerings

Here is the reality—you want more than that.

I am not talking about only money here. Many owners tell me that money does not motivate them when succession planning. You want to take care of yourself, family, customers, employees, suppliers, community, etc. You are also very generous; you want your employees to have a piece of the action.

So did the plan work for Jack? You bet! Jack’s team hit the top tier scenario (best case) in the first year and is on track to achieve Jack’s overall succession strategy.


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About The Author

Chia-Li Chien, CFP®, PMP; Exit Strategist for Women Business Owners at Value Growth Institute in Charlotte, NC. She is the award-winning author of the books: Show Me The Money and Work toward Reward and a faculty member of the American Management Association. Her blog and newsletter was named a Top Small Business Resource by the New York Times You’re the Boss blog. She can be reached at or 704-268-9378.

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