SUCCESSION PLANNING
To sell, or not to sell?

Buyers are everywhere. Are you prepared for an offer you can’t refuse?

BY MIKE COHN WITH JAYNE PEARL

You’re a successful entrepreneur with a well-established business. Throughout your region and your industry you see private business owners selling their companies for apparent fortunes. Now you’re weighing your options. What should you do with your company—sell it or keep it?

The question isn’t as simple as it used to be. Suddenly businesses are merging and consolidating—not for negative reasons (competitive pressures, lack of planning) but for positive ones. Today’s overheated markets and seemingly inflated prices have opened opportunities previously undreamed of. Youthful owners of dynamic companies find themselves tempted by visions of immediate wealth.

Aging owners facing retirement sniff opportunities to “monetize” their illiquid assets. Those 30-year-old instant Internet megamillionaires we read about represent just the tip of the iceberg. Less public but more profound is the sale of thousands of private companies each year—established, mature brick-and-mortar “boring” businesses that command significant premiums and create new liquidity for their owners.

The decision to sell or keep your company often transcends financial considerations. You may feel overwhelmed by a sense that everything you know is rapidly changing. For some owners, selling the business is an attempt to slow down the speed of change. For others, it’s a way to embrace change by transforming illiquid assets into portable, fungible wealth.

“Instantaneous communication and computation are shrinking time and focusing us on speed,” write Stan Davis and Christopher Meyer in their 1998 book, Blur: The Speed of Change in the Connected Economy. “Connectivity is putting everybody and everything online in one way or another and has led to ‘the death of distance,’ a shrinking of space.”

One result: “Intangible value of all kinds, like service and information, is growing explosively, reducing the importance of tangible mass.” Connectivity, speed and intangibles, the authors argue, “are blurring the rules and redefining our businesses and our lives. They are destroying solutions such as mass production, segmented pricing and standardized jobs that worked for the relatively slow, unconnected industrial world. The fact is, something enormous is happening all around you.”

For some owners who lack a clear vision about the future of their business, are worried about competition and lack the management strength they need, this new necessity for constant change may become the final straw that motivates them to sell their company. For others, the opportunity to cash out and move on will be the compelling factors, based purely on financial considerations and timing.

More buyers are in the marketplace today than at any other time in recent history. Companies that never saw suitors before are receiving offers. Mergerstat (which tracks deals in excess of $1 million) reported more than 7,928 business combinations in 1998; the following year, that number increased by 17% to more than 9,200. These 17,000 deals of $1 million or more (public and private companies) represented more than $2.6 trillion of value—exceeding within just two years the volume of all the million-dollar-plus deals of the 1970s and 1980s combined.

What’s more, buyers are paying more for companies today than ever before. In 1992, buyers were paying between 5.4 and six times earnings (before interest expense and taxes) for mid-sized businesses. In 1997, that ratio had increased to six to nine times, according to the Arthur Andersen Center for Family Business.

We’re not talking here about the mega-mergers (e.g., MCI WorldCom/Sprint, Pfizer/Warner Lambert, Qwest/US West) that grab most of the headlines in the financial press. Fully 88% of all deals in 1999 involved medium-sized companies valued at less than $100 million. Many of them never dreamed of selling until they started receiving offers they couldn’t refuse.

Consider one of my clients. In mid-1998, his company was appraised at $4 million by a well-respected national appraisal firm. Two years later, the client was offered $16 million for one division—representing two-thirds of the company’s operations—in an all-cash, unsolicited offer. My client had decided in 1998 that his company would remain in family hands for at least one more generation. Now he and his family are rethinking that decision.

Who is most vulnerable to a potential offer? A 1998 Wells Fargo/National Federation of Independent Businesses study found sellers falling into one of two divergent age groups, with presumably divergent motives: owners in the 25-34 age bracket and owners over 55. The younger seller who “builds to sell” may launch (or buy) and sell several companies during his lifetime, just as an investor might periodically turn over an investment portfolio. But for the older seller who lacks successors and depends on the company for financial security, selling may be not the first choice but the last choice.

No matter how much you love your work and your company, if you lack a succession plan you’re likely to wind up selling. A U.S. Trust Company survey of affluent Americans reports that only 36% of affluent business owners (those with net worth of more than $3 million, or gross income of more than $200,000) had a well-thought-out, fully developed succession plan. The study also found that 53% had thought about a succession plan but hadn’t implemented one, while 11% hadn’t given succession planning much thought.

Where do these buyers come from? Some may be well-known consolidators active in specific industry and trade associations. They may be public companies or private firms that want to go public. Or brokers or investment bankers may call, wondering if you are interested in selling to an investment group. The industries with the most sellers in 1998 and 1999 were wholesale distribution, construction contractors, broadcasting and communications and, of course, computer suppliers and software manufacturers.

Some buyers may approach owners from the perspective of a strategic combination, such as an electric utility company that buys a mechanical or electrical contractor so electricity can be sold to customers before new construction begins. The potential “deals” often sound enticing. The idea of selling and walking away with a pile of cash appeals to many owners. Some sell and then stay on to run the company for the new owners.

You know you’ll have to take some calculated risks in the future, and the business will have to change merely to survive. That being the case, maybe you’re better off letting someone else take those risks—with their money, not yours. That’s what the Hotard family of New Orleans decided when they sold their $18 million (sales) Hotard Coaches Inc. to Laidlaw Inc. in December 1999.

“Every day I worried about how every decision I made was going to impact my entire family,” says Hotard CEO Eva Hotard. Her fears were not unfounded: A major bus accident earlier that year involving another New Orleans bus company pointed out the tremendous potential liability in that business.

“We probably could have grown faster if I wasn’t worrying about wiping out the family,” Eva Hotard says. All seven siblings who owned and managed the business (with their parents) before the sale continue to run it under the new ownership.

On the other hand, maybe the new economy is opening up unrealized opportunities for your company that you haven’t fully capitalized on. The business probably has been a good corporate citizen for years, employing local people from the community and making or distributing a product or service that you and your family are proud of.

Selling the company would likely mean a relocation, a consolidation, layoffs and probably a different way of doing business in the future. In that case, perhaps you should keep the company, borrowing the money to expand and bringing in professional outside management to carry on and thus enhance your family’s legacy.

Either way, change is in the wind.

When life transitions occur—in business or elsewhere—they often trigger deep emotions. Human development consultant William Bridges likens it to standing in the middle of a busy highway as traffic whizzes past in both directions. It’s a frightening experience, but psychologically that’s what people involved in change must do—simultaneously experience the forces from the past and those pulling us toward the future. During this period, Dr. Bridges says, you may experience conflicting emotions and inconsistent behavior: Prospects for the future may seem limitless one day and hopeless the next.

These are psychological issues, of course, and only peripherally business issues. Without working through their stages of change, business owners (like everyone else) tend to repeat the same mistakes. Or they decline into futile yearnings for the past that render them incapable of fashioning new lives for themselves.

Keep or sell? Both decisions involve endings and beginnings, which are never easy. Whether it’s an event or a state of mind, “Endings begin with something going wrong,” Dr. Bridges notes. It may be the loss of a key customer or a decline in profits.

For one of my clients, the critical event occurred when a manufacturing process needed to be re-engineered with a large capital commitment. Rather than incur more debt and risk, the owner decided that it was time to sell.

For another client, losing the sales manager who was the heir apparent triggered a sale to the company’s non-family CEO. A heart attack focused a third client on the need to develop new leadership. For Maynard Sauder, chairman of Sauder Woodworking Co. in Archbold, Ohio, the turning point was the death of his 94-year-old father, who had founded the company.

“That’s when I knew it was time for my brother and me to start working on our succession plan,” Sauder recalls.

Beginnings start with an inner idea, an image, an impression—what Dr. Bridges calls “resonance at the lower edge of consciousness, like a half-formed daydream.” From there, it moves slowly into awareness—like a picture coming into focus on a large screen.

For one of my clients, the idea to sell his business first occurred when he bought his brothers out in 1995. He recalls thinking naïvely that instead of buying out his brothers, it would be nice for someone to buy him out. For the next four years he built his mechanical construction company with two ideas gestating in his mind: first, to let his daughter run the business, and second, to be open to a sale if someone approached him.

As the business grew in both size and complexity, he realized his daughter would face a tough time continuing the business, especially since the two key executives were a generation older than she was. So when a buyer came along with an attractive (unsolicited) offer, the second mental “picture”—of selling the company—began to come into focus. He decided to sell after he and his family discussed the options and found that everyone’s “picture” about the future supported the sale.

The process also involves trust—trust in your own ability to make the right choice and trust (or lack of trust) in others. Beginnings depend on an inner realignment, a new motivation, an unknown future. If you decide to keep the business, it means a commitment to the succession process. And if you decide to sell the company, it means a commitment to a new type of life without ownership of the business.