Launching the Next Generation
Determining who can take over a company and how to transfer ownership are the most obvious questions to ask when contemplating the sale of a contracting business. However, to ensure the ongoing health of the company after the transfer, other critical issues need to be addressed as part of any succession planning.
In most cases, business succession planning begins with a business owner contemplating an exit strategy. This presents questions regarding who can run the company and how to sell the firm. Answering these questions is important to business succession. However, our experience has shown that a successful business succession plan requires answering a much broader range of questions. This is because succession is not a single event; it's a process that impacts every part of the business, including its profitability, and ultimately changes the company culture. Thus, business succession planning should address much more than who will be the future owners and how the current owners will remove their capital.
Internal IssuesWho will be the future owners? - Our recommendation is that the owners of a contracting company should be amanagement team that will drive the business for the next 10 years to 15 years. This is because, unlike absentee ownership, active ownership has a way of focusing managers on both the risks and opportunities a business has.
Who are the future leaders of the business? - Note that we use the term "leaders" and not "managers." Leaders set strategy and drive the business while managers execute strategy. Companies need both, but often the exiting owners were the only people providing the firm's leadership. Thus, successor leadership needs to be identified internally or hired, and then be developed. This probably is the biggest challenge in succession planning.
What impact will a change in ownership and leadership have on the company? - The culture of a company is defined by top management and encompasses the values and vision of the company's leaders in addition to incentives inherent in the reward structure. In a transition, much of this culture is changing despite efforts for continuity. New leaders bring their own values and vision to the table. If they have grown up in the current culture, these may be similar to the traditional values and visions, but there will be differences. Changing ownership changes incentives at the top of the organization and will likely change incentives throughout the company. In addition, picking who will be the new owners and leaders is essentially the same as picking who will not be new owners and leaders - a process that can be disruptive to the organization. All of these changes combine to create a new company culture but should not create surprise.
External IssuesHaving discussed the effects of a transition internally, our next few questions relate to external issues.
What strategy should the company have to be successful in the marketplace? - While the company is undergoing a cultural change due to transition, the rest of the drilling industry will not slow down. While it is tempting to focus internally during a transition and only worry about buying out exiting shareholders, an external focus is needed to develop a strategy to compete in the changing market. In fact, an ideal opportunity to do strategic planning is during an ownership transition. Exiting and emerging leaders should come together to review the strengths, weaknesses, opportunities and threats to the business. Emerging leaders may see the business from a perspective that they have never considered, and exiting leaders have an opportunity to evaluate the emerging leaders' thought processes. This interaction enables the exiting leaders to help shape the new vision for the future, assist the next generation of leaders in developing leadership skills, and establish the future ownership and leadership structure of the company.
What other improvements can be made to the business? - Change is contagious. Stable ownership and leadership has its advantages, but a disadvantage is that processes often become dated. Progress and technology provide opportunities for firms - and their competitors - to advance if they are open to new ideas. The internal focus of an ownership transition is an opportune time to question old habits and reevaluate some of the "untouchables" in the organization.
Traditional ConcernsOur final set of questions is more traditional to business succession planning.
What are the current owners? personal goals? - For a business succession plan to be successful, owners must know what they want to achieve and set reasonable goals for doing so. For example, an owner may want to be removed from all ownership and management responsibilities in one to two years, but this goal may be unreasonable since successful succession plans generally take five to 10 years to complete.
What price or value should be placed on the stock to be transferred? - Many exiting owners have a price in mind that they "feel" is appropriate based on the years they have spent building the company, as well as a host of subjective factors. A professional third party appraiser can provide an objective valuation, and some may be quite detailed and complex. However, such theoretical values are not as important in an internal transaction as the successors - ability to pay and the future earnings of the company since most of the funds used to finance the deal will likely come from ongoing profits.
How should a sale of the company be structured? - The right structure is situation-specific and dependent on factors such as the structure of the current company, the objectives of all parties and financial performance. Although the ownership transfer technique itself is always a point of focus for exiting owners, it is usually the easiest piece of the business succession plan to execute - if the company has strong profits.