News Release

How to Avoid Low Valuation with Succession Planning

While there are many things that need to be taken care of to prepare for a successful business sale and exit one of the one’s most founders and owners neglect is to have a strong well thought out Succession Plan in place well in advance of putting the company up for sale.  While a strong auditable balance sheet, good product and service mix, good backlog are all-important the most valuable asset many companies have are their people.  With a strong well conceived and executed succession plan strategic buyers and investors will have a better feel for the businesses ability to be integrated and operated profitably after the owners and leaders have left.

Why else should you care?

  • You or your CEO is nearing retirement and you want to exit upon deal close
  • You have key people who have equity and can leave on exit and no one to back them up
  • When a sale is in process key competitors will attempt to pick off key employees

What are the issues if you don’t have a succession plan in place?

  • More than likely you will be certainly held in place with an earn-out offer, which can last 1-3 years and put a considerable amount of your equity you and your investors have earned at risk.
  • The overall valuation will be lower if they buyers believe you have not put in place a high enough quality of leadership to insure their longer-term investment.
  • If you are trying to show you are a growing company with a strong future buyers will want to see how you are preparing your mid level and senior staff to deliver that forecasted growth.
  • They will expect to see whom you identify as leaders and what you have done and are doing to develop them. This relieves the buyers of the need to insert significant new leadership and keeps turnover and business integration issues to a minimum.

 

Having an Executive in place that can take over from the Chairman and CEO that has been groomed for the job and can be incented to stay can make a due diligence go much smoother.  I have seen this multiple times in my working with Private Equity companies in the U.S., Europe and Asia.  Small or large companies all benefit from this preparation.  Even still, according to the Stanford Graduate School of Business 2014 Report on Senior Executive Succession Planning and Talent Development 46 percent of respondents answered “no” to the question: “Is your company grooming a specific executive to succeed the current CEO?”  Time to replace a key Executive can take 3 months or more.  Making it more likely you will be tied to your company for some time after an acquisition if you don’t plan now.  This example also is true for the CFO and the Chief Growth Officer.

The time to plan for succession is well before planning to sell.  At Cortland this is something we have been doing most of our time in Industry as Leaders, Founders, Private Equity and Investment Banking professionals.  Our Advisors and Partners are here to assist you to prepare for exiting your business successfully.

 

Ken Taormina
President and Founder
Cortland Advisors, LLC