Succession Planning - Exploring the roadmap to your retirement
Whether you plan to spend your retirement sipping frozen margaritas on a white sandy beach or napping in your backyard hammock, if you’re a business owner, succession planning is the roadmap that will get you there.
Even if retirement seems far off, now is the time to start developing your succession plan. Succession planning can benefit you today by helping uncover strengths and weaknesses within your company, providing peace of mind and retaining critical employees by helping them understand future opportunities.
Depending on your unique situation, you’ll have to select the best strategy for your business. Two SMACNA Greater Chicago members share their experience on both sides of the issue.
Tim Russell - A Path to Ownership
In his mid-30s, Tim Russell, president of GHC Mechanical, decided he wanted to be principal of a mechanical contracting business.
“Businesses are commonly for sale, but you have to know key people in the industry. People I knew — through SMACNA Greater Chicago and other associations that surround our industry — helped me find the right people to talk to,” Tim said. “I ended up talking with five smaller companies, and of those companies I felt GHC Mechanical presented the best opportunity for me.”
Tim then sat down with the founder and his nephew, John O’Brien Jr., who is now Tim’s partner. Together, they developed a plan for the two new partners — virtual strangers at the time — to buy into the company.
“You really have to take the hands off the clock because of the time element. Transitioning a business doesn’t happen overnight,” he said. “When John O.B. and I came in, we had to demonstrate that we could handle the day-to-day functions. It’s a big learning curve, and you learn as you go. Every single aspect of the business needs to be addressed. You have to listen a lot, pay close attention and offer suggestions — but at the end of the day, you really learn the value of the gray-haired guy who has been there and done that. It’s something you don’t really appreciate when you’re young, but really start to see over time.”
Tim said the succession process must be handled step-by-step, and that he feels his prior experience at three established companies has been instrumental in his success.
“I think the previous owner did a great job of transitioning the business. The initial transition really took about 10 years,” he said. “Broad experience is a real key when you’re taking over a business, as is knowledge of the industry and patience. You also need to act like an owner before you are an owner. That’s important. It means taking responsibility, being accountable and figuring out how to approach things from a global perspective.”
Al Youna - A Carefully Crafted Succession
Al Youna, president of YMI Group, said one of the best things he did early in his career was seek out a peer group through the Chicago Family Business Council. It was through this group of well-rounded entrepreneurs that he gained invaluable insight into several aspects of his business and finances, including succession planning.
“Through this group, I was able to listen to nine other CEOs talk about how they plan to fund their retirements and transfer their businesses to the next generation, whether they were selling to partners, the public or handing it down to their children,” Al said. “Like many business owners, I hadn’t put a lot of thought into my plan at the time. But listening to their experiences made me realize I do not want to rely on the sale of my company for a big cash day to fund my retirement.”
According to business broker statistics, less than 25 percent of all businesses that go on the market sell, and one-third of businesses that close are successful at their termination.
Statistics like these are one of the primary reasons that Al decided to build a succession plan that wouldn’t put a financial anchor around any of his children or other potential owners.
“A few years ago, I decided I didn’t want my retirement to be contingent on the sale of my company. Instead, I worked with a financial planner to develop a 20-year plan. Once I reach that time I could basically decide to walk away from the business, and I’d be able to live the same lifestyle,” Al said.
Al said that regardless of how close you are to retirement, the best thing you can do for yourself and your business is to start planning now.
“A lot of business owners think they’ll just sell when the time comes, but you never know what the next 10 years are going to bring — and whether they will be profitable or not. And as a business owner, you need to find ways to minimize the disruption and cost of your departure. Plan a 10, 15 or 20-year transition period so that the process is seamless and doesn’t jeopardize the finances of the entire company,” Al said. “I strongly urge all business owners to sit down with a financial planner. First, decide when you want to call it a day, and work backwards from that date to where you are now. It’s one of the single most important things you can do for yourself, and for your business.”
CONSIDER YOUR APPROACH
Depending on your unique situation, you’ll need to select the best type of succession plan or exit strategy for your business. Common approaches include:
Selecting someone qualified, trained and ready
Target date replacement
Selecting multiple employees and narrowing the list over time
Creating a pool of applicants with varying qualifications
Transferring ownership through a management or employee buyout
BY THE NUMBERS
Sources: U.S. Census Bureau, GOBankingRates and CNN Money.
70 - The percentage of your pre-retirement salary you’ll need to live comfortably.
55 - The percentage of Americans with less than $10K saved for retirement.
18 - Average number of years spent in retirement.
63 - Average retirement age in the United States