Will My Beloved Business Survive Me?
Succession planning is best done before disaster strikes
Ron Norelli stood at a crossroads in 1991: His three-person Charlotte
(N.C.) corporate-planning firm was turning business away. He could afford
to put the kids through college and still take vacations. But the 55-year-old
entrepreneur knew that Norelli & Co., which he founded in 1981,
had no future once he retired or died. Should he try to give it one or
leave it to fade away behind him?
As is true at many small service companies, the founder's personal qualities
are the company's principle asset. "When clients called, it was me they
were calling, not necessarily a firm. If I left, for all intents and purposes,
the company would cease to exist," he recalls. "I decided I wanted there
to be something that could continue without me." Norelli's kids weren't
going to be ready to take over any time soon. So he knew he needed a plan.
Norelli's forethought made him unusual. Few entrepreneurs formulate succession plans
before tragedy strikes. Typically, the owner or family members leap into action --
when it's too late to do much besides liquidate the company. About
70% of successful family enterprises never make it to the second generation,
according to a U.S. Commerce Dept. study. That's in no small
part because most lack a succession plan.
LET GO. "Entrepreneurs by their nature think they're infallible," says succession
plan expert Mary Cenowa of McGladrey & Pullen in Minneapolis, Minn. Many are too busy
running their companies to consider anything else, she says.
But it takes a well thought out blueprint that dictates who runs
the business in the event of the founder's departure or demise -- as well
as who pays how much for it and who gets it.
And that's the hard part, as Norelli discovered.
Even after a business founder realizes the need for a succession plan, putting it into place can be a disillusioning
experience -- many times, no one wants to buy a company without the person behind it.
Norelli thought he had a good plan, though a serious illness in the
family kept him from acting on it until 1995. He decided to seek an outsider
to inherit his throne and buy him out. He formed a board of directors and hired consultants to give
his operation more muscle. Then, he engaged a search firm to recruit his
successor. With an attorney and an accountant, Norelli drew up an agreement
spelling out how and when the successor would buy him out and setting
a value for the company.
Norelli hired a candidate, and they struck a deal. Things began to crumble
two years later, when it came time for the successor to start buying Norelli
out. "He didn't want to take a risk," he says, "so I had to start all over
This time, Norelli conducted his own search, tapping people he trusted
in his business circles. Another name came up, a banker 10 years Norelli's
junior. The company's entire staff interviewed the candidate. And after he passed
muster, Norelli hired him. The founder also promoted a staffer to vice-president, making him next in line,
and drew up a new buyout schedule that began in 1998 -- only one
year after the successor joined the business.
Norelli is clearly relieved. "My backup and his backup are in place.
We now have nine people, including five who own
stock. If something were to happen to me, Norelli & Co. would keep
going," says the consultant, who still retains a controlling interest. "It's not easy," he admits. "People
who found companies often don't want to think that maybe they're not going
to be there some day."
Actually, there are good present-day reasons to draw up a succession
plan, even for those who hate to confront the future. Having one in place
increases a company's value, says Cenowa. It underscores that the company can run
on its own and spells out an orderly disbursement of the assets. Otherwise,
the designated successor may find that he or she
can't step into the leading role because the company's ownership is
tied up in probate or disputes with family.
MORTALITY. What does it take to get entrepreneurs to focus on this intimidating
task? Concern about family sparks most plans. "Most often, it's the entrepreneurs realizing
they are mortal that makes them come up with a plan," reports Cenowa. "Second
to that is the spouse or significant other wants some time together. Third
is when entrepreneurs between 40 and 45 start thinking along the lines
of early retirement. This is when it's most efficient, because a good succession
plan can take 10 years to implement."
Bob Schneider knew all too well about the importance of facing one's mortality head on. He started
formulating the most recent succession plan for his Macedonia (Ohio) patio
business about a decade ago. He was then 46, his mother's age when she
died. Schneider's father started the business with a partner. Seven
months after the founding, Schneider's father was diagnosed with a brain
tumor. Schneider quit an academic career to take care of
his dad and the business. That was more than 30 years ago. Today, Patio
Enclosures Inc. employs more than 650.
Schneider's succession planning took several detours. In 1979, the original
partner wanted to retire. Schneider feared buying him out because Schneider's
assets were thin. So they put the business up for sale. A venture-capital
group evaluated the company and came up with a price. Schneider initially
agreed, but reneged when the VCs changed the terms. Still, there was one
positive result of the whole ordeal -- a thorough valuation. Based on the
new numbers, Patio Enclosures bought the partner's stock and retained him
as a consultant for 10 years.
When the consultant's contract ended, Schneider was pleased with the
business -- it was cash rich, debt-free, well organized, and had a solid
market position. Yet he remained unsure of its path. Schneider
considered taking it public, but he didn't need the money and loathed being
tied to public projections of cash flow and quarterly earnings. He considered
selling, but didn't want to relinquish half of his profits to capital gains
-- or be out of a job.
Schneider tackled a management plan first. He knew he needed to groom
a successor but feared getting stuck with the wrong person. "I brought
in somebody in 1990 as VP of manufacturing. Rather than whisper in his
ear that I had plans for him to take over, I knew I needed to try him out.
I gave him some paths out of his area to see how he would do. He's doing
very well. In 1992, I made him president and COO," Schneider says.
Then Schneider tackled disbursement of assets. "In 1995, I came to the conclusion
that I didn't want to have any partners in the future," he says. "So we decided
on an ESOP," or employee stock ownership plan, a structure that allows an owner
to transfer shares to the staff and has significant tax advantages for
the owner and the company.
Schneider initially turned over 30% of his stake to his employees, which
the company paid for out of earnings. He recently relinquished 10% more.
He says the succession plan is going well. "I get to stay and run the company in
the way I've been running it. I know I need
to make myself unnecessary, so I've been firing myself from different responsibilities,"
says Schneider. "In another six or seven years, they can get rid of me
if they want to. And the business will live on." That's a legacy worth
By Carol Dannhauser in Fairfield, Conn.
To: PERSONAL BUSINESS