You work hard your whole life to build a secure future for your family — and, of course, for that sweet pot of gold at the end of the rainbow, otherwise known as retirement. However, what will happen to your business when you make the transition from boots to bare feet in the sand?

If you’re planning to pass your business on to the next generation of owners — to a member of the family or otherwise — you should have a succession plan in place.

We consulted experts Kevin Kennedy and Joe Bazzano, CEO and COO of Beacon Exit Planning, respectively, to find out how a roofing contractor can successfully create and execute a succession plan for his or her company. 

In the second of this three-part series — which also includes exit strategy and contingency planning — we’ll explore common mistakes made during succession planning and best strategies for leaving your business legacy.

What Is A Succession Plan?

While exit planning focuses on “replacing your wealth,” succession planning focuses on “replacing yourself,” Kennedy says.

A succession plan prepares a company to succeed without its owner by moving management into leadership, then into ownership and establishing the new CEO.

“In a broader sense, it’s about building value — creating a culture of continuous improvement that focuses on educating the next generation of owners so they can protect the future of the company,” Kennedy says.

He has plenty of experience and advice when it comes to succession planning. Kennedy and his two business partners successfully purchased a second-generation company from the son of the original owner, then grew the company to more than 200 associates and eventually sold it to a fourth generation of owners — an extremely rare accomplishment.

Fewer than 30 percent of all private companies ever transfer to the second generation, which means that 70 percent fail, according to Kennedy. Statistics are even worse for the second to third generation — a 90 percent fail rate. The odds that company founders will transfer their business to their grandchildren are less than 3 percent.

Kennedy and his partners sold their company via a management buyout, which took seven years and a quarter of a million dollars.

“Our company overspent millions of dollars in taxes that were unnecessary,” Kennedy says, “because of the cookie-cutter advice from our advisors. They weren’t specialists. It wasn’t a coordinated plan, they didn’t have the right advice and they didn’t understand the laws, so we were put in a taxed position.”

Timeline

Succession plans can take from three to 10 years, depending upon the maturity of the managers and how much the owner is working.

The process of succession requires more time than exit planning because of the learning curve needed for new managers. They need time to understand how to run the business, make mistakes, learn from those mistakes and find their own path to leadership.

“At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue,” according to the Small Business Administration (SBA). “The primary cause for failure is the lack of planning.”

Kennedy says the SBA also notes that 75 percent of a typical business owner’s net worth is tied up in the company, and only 22 percent of owners report planning for their succession or exit.

Succession is about finding the right people and getting them onboard. Surprisingly, if you are considering three or four people for ownership, the one you think has the most potential in the beginning may not, in the end, be the one most qualified to take over the business.

“Wise people plan early and implement slowly,” Kennedy says. “I like to see people going through the process of visualizing their financial future at least 15 years out. That would be ideal because it may take three or four years to set the plan in motion.”

Common Mistakes And Strategies

Succession planning is more difficult and emotional than you ever imagined, Kennedy says — especially when family is involved.

Children or other family members who think they’re entitled to the company can be poisonous to the succession process, he explains. Not holding them to the same standards and accountability as other employees ruins morale for everyone.

One way to prevent potential issues in a family succession is to do a 360-degree evaluation from the top, middle and bottom. Peer reviews can reveal areas that need improvement. It’s a self-realization for managers, as well as a coachable moment that can help prepare a family member to build a positive and successful legacy for the company.  

“Another problem [business owners face] is they can’t see their financial future and are dependent on their business for their day-to-day life,” Kennedy says. “If they don’t relinquish what duties they have so they can build new leadership, they tend to get stuck in their businesses.”

Bazzano shares three important steps for succession:

• Have a good financial plan so you can understand what the future income needs will be for the company.
• Get a business appraisal so you understand if you have a value gap. In other words, if you have not saved enough money for retirement, the shortfall is going to come from the sale of the business.
• Put a good management team in place so it can support you in generating the income the business will need to pay you out. This step typically takes the longest — anywhere from two to 10 years.

“The great news about succession is it always adds to the bottom line, not just the financial value,” Kennedy says. “It creates that championship team that’s always getting better with continuous improvement, no matter which exit plan an owner takes. It’s always adding value to the company. The key is to start early because succession takes time. It’s a complex process. The exit plan will get you started and the succession plan will bring everything together to allow a graceful exit from your business and protect your wealth.”

To learn more about Kevin Kennedy and Joe Bazzano and access more in-depth information about the succession-planning process, visit BeaconExitPlanning.com.