Is There an Inheritance – Succession Planning

When I was in the military, we operated on the premise of expendability. This premise forced us to train and develop our replacement. The idea was to ensure that the cross training would develop an individual to step in and be effective in the area that was immediately made available by an unplanned exit. Not only did we train individuals in the technical aspects of various specialties in a team, we developed leadership and management skills. In its simplest sense, what we did in the military was succession planning - developing your replacement.

It is amazing how quickly many of the great lessons learned in the military go by the wayside when one engages in business. I believe that this is more function of academic deficiency than it is the common sense that intuitive business leaders engage in. My experiences in succession planning and the lack of it span private companies as sole proprietorships, startups and to the larger corporate environments. In most every case, succession planning was not a fundamental in any of the business type entities.

My first regression story goes to the second business that I started after leaving the military. I had a very successful landscaping business. I was able to build it from a one-man operation to having up to twenty employees. It started in the maintenance services and transitioned into irrigation and landscape design and construction. In the late 1980’s this was a wide open market and very lucrative. The business was growing, the margins were great and the cash flow was

The training program that was in place was to develop technicians that could install irrigation systems and other landscape construction technologies. The company did not have any other engineer, designer, planner, sales and marketing person other than moi-même. The company was a sole proprietorship with employees. At this time I was able to scale back to about seven to ten depending on the project size. This meant that I was the primary chef for all the business side activities. I was relatively young, in my mid-thirties and had a great family too. I thought that if I built the business correctly, it would have a legacy that I could raise my children up into. This would be something they would inherit. You know, the idea of a family owned business. Heck, I never thought about an exit strategy in my business plan or how my children would be imbued with the characteristics needed to follow in my foot steps, everything seemed perfect at the moment.

Did you know that more than 80 percent of all businesses in the United States as well as throughout the world are family owned? And, unfortunately, most of them, some 65 percent, never survive beyond the founding generation. The tragedy being that there is not a well defined plan that deals with the issues of who will do what, when and what skills does son, daughter, cousin or other relative need to have to ensure a business entity with a sustainable legacy.

In my case, I never took the time to plan and then an unplanned exit event occurred the third year into the business. My wife and I had just bought a large parcel of land and we were constructing a barn from the timbers on the property. For some unseen reason, I tangled with a chainsaw. The resulting accident was significant to my person but more so the business. There was no one to step into all those skill sets that I just mentioned a couple paragraphs back. The net result was:

• No project management for scheduled jobs
• No marketing and sales activity – no new jobs bid
• No back-office management – this was left to my wife who had virtually no insight to the operations of the company
• Taxes became over due
• Vendor accounts became over due and called in
• Seven people were laid off
  

In the end, I had to liquidate and shut the business down. We did not have to file bankruptcy but sure did come close. My recovery time was about a year and it took longer than a year to get all the debts paid off and back on our feet financially.

Lessons learned were:

1. Identify the critical operational and back-office skills that need to keep things functioning
2. Set up a training program
3. Identify the key personnel that have commitment to the business and want to learn more
4. Develop their skills – mentor them
5. Give responsibility and authority to those who can prove they have learned the skills
6. Think through the what ifs, the Murphyism – what is risk management
7. Develop the Exit Strategy
8. Have good communications in place
9. What I learned in the military for training your replacement is applicable in business
   

The simple facts are that we do not know what life will bring our way as we journey through but good stewardship of a business requires that planning is a part of the overall process to sustainability. Know that a Succession Plan can be as simple as training and mentoring employees will provide an avenue for the business to continue in the event of some unplanned event that may cause one or more of the key persons to exit; either temporarily or permanently. What is your Succession Plan? What are the key elements that should be considered?

I learned after this business adventure that I would do all I could in my future businesses and even in the corporate world to understand an exit strategy that incorporated a succession plan.

Policy and Location - What Does it Matter?

Today the Small Business and Entrepreneur Council released it new report:

SMALL BUSINESS SURVIVAL INDEX 2009:
RANKING THE POLICY ENVIRONMENT FOR ENTREPRENEURSHIP
ACROSS THE NATION

It is important to understand what is happening in the policy development of our various states. It is not only what the Feds do in regards to their supposedly limited role in commerce according to Section 1 of the Constitution but more importantly what are the affects of local and state legislators.

It is unfortunate that most of us engaged in the SMB, entrepreneurial and investment communities are running hard and fast to keep the lights on; therefore, we don't always have the time to deal with policy issues that affect us. I appreciate the work of the SBE and the conservative approach to business that makes life better for us all.

I have learned that policy affects how business is done as much as the market and customer demands. I've also learned that where we establish our business entity matters when it comes to net profits. I always tell those that I have the opportunity to consult with that we need to look at what the ultimate legacy will be of the business entity and then choose the correct entity type and where it will be initially registered.

I would encourage you to look at the report to see where your state ranks. As you consider what your business entity is and if there are areas of concern, give me a shout and I'd be glad to have a chat.

A Story of Why An Executive Exit Strategy

I learned my first and greatest lesson about executive exit strategies from a business I had back in the late 1980’s. In my case what I would have hoped to be an executive exit strategy based on wealth building turned out to be an exit based on disaster management.

The business was a sole proprietorship with employees. This was my second endeavor as a sole proprietorship, the first being very successful. I just transitioned this newer business from a service industry to a construction/manufacturing environment. I was moving forward with really fantastic growth. The revenues were in the six figures and net margin was running between 17% to 20%. All seemed to be going really great!

Then disaster struck! This was not some natural disaster since there aren’t many of those in the Pacific Northwest. This was an accident to my person. The details of what the accident was are not as important as the results to the business. I do have to say that I was personally laid up for six months and it took a good year before I was really able to engage in any type of labor.

The facts of what happened to me as the president/owner of the company totally affected the business entity. These are key areas that were affected and not planned for by an exit strategy or disaster contingencies (they are in no priority order):

1. No new jobs were bid. Why - A lack of personnel training and succession plan. Result – Employees were laid off do to a lack of scheduled projects.

2. All the administrative responsibilities fell to my wife. She was not involved in the business prior to the accident. Why – Never communicated to her the details of what was going on. Result – Added stress to her life that included a full time job and five-year old twins. Having to deal with vendors, taxing authorities and employees.

3. Cash flow stopped and the collectors came a knocking! Why – No jobs being bid and accepted meaning there was no income. Result – Outstanding debt was being called in. Payroll taxes accumulated and were now having penalties being added. Labor and Industries taxes were due. The business was out of cash.

These points were disastrous for the business as an entity in that there was nothing that contributed to sustainability. What I learned is that many executives in small and even medium businesses have not planned an exit strategy for the business entity let alone themselves or developed a strategy/plan that would include disaster recovery.

Exit Strategies and disaster planning (a part of risk management) are integral to a business plan. In a simple sense they are for the purpose of seeking new capital and showing investors how they will get their return and in a more complex sense for the personal exit of a business executive. I cannot emphasis enough that this is as important as the idea for the business in the first place.

I do work with business executives (NCDCS, Inc. Services Link) in establishing the business entity Exit Strategy as well as personal exit strategies.