I am here to talk about Succession planning
You are C-suite representatives, and for you, this is a matter of importance to the longevity of your organization.
Recently, Jamie Dimon of JPMorgan said 12 million businesses valued at $10 trillion will transfer in the next 10 years. A serious impact to the economy. His concern, I suspect, could be 3 fold.
- M&A business opportunity for the investment banking side
- Millions in loans are outstanding. A banker considers the risk of repayment.
- A good banker is an advisor who offers sage advice on finance and the economy.
According to a bank survey, only 8% of companies have a thorough succession plan, a large number have an incomplete plan, and many have done nothing in this regard. You’re a CEO, the main decision-maker, you built the company. The corporate knowledge resides with you. You have been stressed over business issues and getting older. You are beginning to think it’s time to plan an exit. You go home at the end of the day, have dinner, feel a little discomfort in your chest, and sit down on the couch watching tv. The pressure increases, you pass out. Your spouse calls 911, they arrive, transport you to the hospital, where you’re pronounced dead. A lot of deserved sorrow and grief.
What happens to the business, to the employees, the customers, the suppliers? Supplies are coming in and product needs to be delivered, bills need to be paid, payroll needs to be met. Do employees have a job? Are they job searching? What is the impact? What are stakeholders thinking? Is there key-man insurance as an alternative to potential bankruptcy or business devaluation?
I work on succession planning to develop and retain leadership talent for transition and then exit at a higher valuation. What is the impact on all the stakeholders? Having worked in private equity, what do buyers/investors want? What will they pay extra for? Less risk will produce a higher multiple, which means a higher valuation for the shareholders from the transition of the company. Investors want stabilized earnings growth, EBITDA growth multiplied by a variable multiple of 3 to 10 times earnings, probably in the 4-7 range, and they want a competent leadership team. I help with the transition and offer eight recommendations for consideration: Mission, Vision, Culture, Communication, Teamwork, Delegate or fail, Decision making, Metrics for performance.
You select what you’d like to focus on. I’ll spend an hour with you at no expense. Beyond that would be a $2,000 cost, and we can talk about a succession plan to the level agreed upon after that.
Key man insurance offers a lump sum payment as an alternative for loss of a key employee. A $3m term policy is affordable for most small business. Premiums are company paid. When a key person dies, sales decrease on average by 60%. Multiply compensation by years to recover from their passing. A suggestion is 10x salary or financial contribution. It’s an alternative to bankruptcy. Business owns the policy and payout is to the company for the financial impact of the loss. It can be used for covering debt, funding of a recruitment replacement, offset of revenue loss. It will help maintain continuity, but it is still a one time lump sum payment. Now what?