The Business Transition Blog

Succession Strategies for a Pandemic

The scientists predictions were right. In 2009 I wrote this (now abbreviated) excerpt from my book, The Business Transition Crisis – Plan Your Succession Now and Beat the Biggest Business Selloff in History. If you heeded it, congratulations. If not, it might not be too late.

The world is preparing for a pandemic. Worst-case scenarios predicted by health organizations would indicate that 50 percent of employees could be off work at any given time either from the illness itself or from fear of catching it.

What plans do you have in place to keep your business running in this event or some other calamity? This situation shows the ongoing and vital need for cross training and preparation for sudden, unexpected, and unpredictable events. But a pending pandemic isn’t the only reason for succession planning. Every position in your company should have back-up so you can continue to operate despite any setback – illness, natural disaster or a strike.

You’ll be better prepared by having documented systems in place so that others could step in and follow directions. But still, how well would your business run if you suddenly lost half of your people?

And it’s not just a pandemic. What would happen if your competitor recruited a key manager? What would it cost you to replace her? Who is groomed to take her place? You might avoid this very costly and disruptive situation by planning regular, open, respectful communications with your managers. Striving to become an employer of choice will not only help you attract top talent, it will help you keep the talent you already have.

What if a senior manager had a heart attack and died? Consider the cost of replacing a key person especially at the most inopportune time, such as the month before tax deadlines or in the midst of important negotiations with a major supplier. Are others in the department capable of carrying on the essential activities and getting the required results? Do you have life and disability insurance to offset the costs of losing your key people?

Who could replace you? What if you get sick or die? What if you no longer find working in your own company to be invigorating or in your best long-term interests? Many companies that look like the walking wounded are the result of an owner who has lost hope, lacks confidence in the future, or has lost interest in continuing to run the business.

While you may have heard all this before, it is even more relevant and urgent in the current crisis. Expect the best, but prepare for the worst.

Value vs. Price

Value and price are moving targets, different for everyone. There are many variables that contribute to perceptions about what your business is worth. Let’s say you believe your business is worth $1 million. But do you want:

  • Payment in cash so you can purchase a second property or invest wisely and diversify your wealth?
  • Payment in instalments so you have a guaranteed income for life?
  • Payment into a trust for your children?
  • Shares of the company that has acquired yours?
  • Donation to a charity of your choice to create a legacy?

In addition you must consider the buyer’s concept of value. Does the buyer want:

  1. A write-off to reduce taxes on another business?
  2. Your customer list?
  3. Your employees?
  4. Your technology, patents or intellectual property?
  5. Your unique products or services?
  6. Access to a broader, international market?
  7. Access to stronger purchasing power?
  8. Your location and/or real estate?
  9. A greater presence, control of, or monopoly in the market?
  10. Your reputation?
  11. Your predictable cash flow?
  12. Synergies that enable cutting of expenses and overhead to increase profit?
  13. Systems, processes and procedures that helped you become successful?
  14. Your website and social media presence?
  15. Your brand?
  16. Your expertise and abilities?
  17. Your entire operation to be managed by the new owner?

Initially, most people I talk with about transitioning their business think that their best option is the last one; but they haven’t seriously considered the others. With so many variables, you can see that value and price are quite different. For example:

  • You might have an easier time convincing someone to give you $7,881 per month for 15 years (at 5% interest) than a million dollars in a lump sum. You take some risk, reduce your tax liability, and enable the new owner to pay you out of profits created by synergies or increased sales.
  • You might be able spin off a part of your business that is not important to the new owner and sell it to someone else. For example, half of your $1 million valuation could include real estate that isn’t important to the new buyer because what they really want is your customers and employees.  You may be able to sell them what they want at your asking price and still keep the real estate.
  • You could leverage your $1 million by buying a life insurance policy that would pay $10 million to your family or favourite charity on your death and have the new owners pay the premiums.

There are many alternatives to consider. Ultimately, your business is worth what someone is prepared to pay for it. Think beyond what you believe is the way a transaction should go and consider creative ways to structure a deal that gives you and your acquirer exactly what you both want.