Posted on

A Case Study In Succession Planning

Overview:

The company was founded in the 1940s becoming one of the premiere mold-making facilities in the United States.  Eventually, they offered complete injection molding and product assembly along with other manufacturing support processes to their customer base which included the furniture industry. The company consists of two manufacturing locations within the United States and has approximately $15M in revenue.

The Situation:

  • Ownership had established a comprehensive estate plan but had not developed a succession plan.
  • The owner passed away leaving his beneficiaries without a clear path forward regarding the business interests.
  • Estate trustees were looking for a third-party recommendation on how best to maximize the enterprise value of the estate.

The Solution:

  • DWH performed a thorough assessment of the company’s leadership, financial and management information, operations, and marketing and sales to draw conclusions regarding the company’s current situation and future prospects.
  • DWH provided numerous recommendations which included a risk/benefit analysis.
  • DWH determined the best path forward was an expedited sale or a winddown and liquidation of the company.
  • DWH was hired to implement its recommendations which included facilitating an expedited sale of the company to a strategic buyer within 90 days of engagement to maximize value.

The Outcome:

  • The transaction was successfully completed within the desired timeframe.
  • All creditors were paid and the proceeds to the estate were double what would have been achieved through a liquidation.

 

Posted on

Succession Planning: Preserving Company Legacy

Business colleagues discussing work

Determining when and how to transition leadership or ownership to family or employees is vital to preserving a company’s value, legacy, and continuing success.

Yet, according to a 2021 survey, fewer than 34% of family-owned businesses have a formal succession plan that has been communicated to stakeholders. Failure to have a plan in place not only puts the family business and family relationships at risk but can also have an impact on employees and the community.

When it comes to developing a strong succession plan, it’s best not to go it alone – it is a team sport involving legal, financial, and business advisors.

By being proactive, you can ensure smooth transitions, optimize strategic development options, and maximize value so that the business thrives for generations. For instance, bringing in a third party to conduct an assessment can help to uncover current challenges and blind spots, not unlike how your trusted mechanic performs a multi-point inspection on your car. This drives an iterative discussion on observed challenges, risks, and opportunities, which are then contrasted with best practices.

Additionally, you’ll want to work with key members of your team to align expectations for the company’s future – that could range from transforming the business for the next generation to specifying a transition plan for leadership positions, to the development of individuals or family members. Whatever the scenario, the goal is to create alignment in vision and strategy.

If your business doesn’t have a plan in place, we can help, as our business advisors have helped many clients develop their succession plans. We can facilitate a planning process that is both strategic and integrates succession in such a way that considers the ‘why’, ‘how’, and ‘what’ of your business.

Our planning process includes action points that address near-term gaps and achieve mid-to-long-term objectives – all while reducing risks. We’ll also provide ongoing support with resources and experience to guide process improvements, capability development, and implementation of the plan.

To learn more about our strategic succession planning and transformative processes, click here.

 

If you found this topic interesting, our strategic partner, JACO Advisory Group published content you may find relevant as well: Family Business Planning – Preparing the Next Generation to Lead and Who Should be Next in Line to Lead the Family Business?

 

This post was co-written by:
Marcel van der Elst, DWH Senior Director, and Jordan Gunn, Collaborative Designer

Posted on

The Importance of Transition Before Transaction in a Family Business

Business colleagues discussing work

A transition is defined by Dictionary.com as “the process or a period of changing from one state or condition to another.” When most family business owners and their advisors think about succession planning or the sale of a business, the focus often becomes how to structure or transact “the deal”. The structure of any transfer of ownership in a business is very important and owners should have qualified advisors to help them consider the valuation, legal, tax, and financial implications of any deal. However, the value of a business is derived from its ability to generate and sustain positive cash flow. Therefore, before a business can have a successful transaction (sale or partial sale), it is important to have a successful transition. A business must focus on transitioning leadership, knowledge, and relationships and establish strong financial controls prior to the transaction taking place in order to maintain and increase the value (cash flow) of the business.

Leadership

In their book Built to Last, authors Jim Collins and Jerry Porras identified management development and succession planning as a key differentiator between visionary companies and their peers. These visionary companies often began planning for leadership transitions as soon as a new leader would start! For family businesses looking to sell or transition to the next generation, leadership transition is critical. Businesses must have a plan in place to gradually transition leadership responsibilities from the current generation (or leaders) to the next generation (or leaders) prior to a transaction. This will allow the business time to evaluate the new leaders and ensure a smooth hand off of responsibilities prior to the existing owners exiting the business.

Knowledge

Many family business owners have grown up in their business and know elements of the business better than their employees. Owners have critical knowledge that must be passed on to the next group of owners and leaders. This knowledge might include the history of the business, strategic planning, new product development, critical processes or systems, or understanding of the competition. These are pieces of information the next group of leaders or owners will need in order to continue the success of the business. Therefore, it is critical the knowledge is transferred from the current owner to the next group. This process will take time and should be planned out.

Relationships

Owners often have long established relationships with key stakeholders in their business. These relationships include customers, vendors, investors, lenders, and employees. However, these relationships could also be with key advisors, such as CPAs, lawyers, and consultants, or key community stakeholders. All of these relationships took time to develop and are important to the continued success of the business. Understanding that relationships take time to build, it is important the business develop a plan and timeline for transitioning these key relationships to the next group of leaders to ensure continuity and establish a process for educating the new leaders on the history of these relationships.

Financial Controls

Transactions are usually a leveraging event for a company. The company or new ownership takes on debt in order to buy some or all of the company from the previous owners. This increase in debt requires the company to have a strong balance sheet and sustainable cash flows in order to service the debt and the ongoing business. How can you ensure a transaction will be successful? Make sure the business has strong financial controls in place. These controls include regular, accurate, timely and relevant financial reporting, a 13-week cash flow forecast, separation of duties, and an effective finance and accounting team. These controls will help protect a business’ balance sheet and cash flow during and after the transaction.

The sale of a family business, to an external party or the next generation, is a significant event. The more a business focuses on transitioning leadership, knowledge, and relationships, and establishing strong financial controls prior to the transaction taking place, the better the chances of a successful transaction.

If you would like to discuss transitions related to family businesses, please contact us.

If you found this topic interesting, our strategic partner, JACO Advisory Group published content you may find relevant as well: Family Business Planning – Preparing the Next Generation to Lead and Who Should be Next in Line to Lead the Family Business?