Selling a company, especially one you've founded, has to be one of the toughest days in an owner's life. To a busy restaurant operator, that day always seems "years away," well on the horizon. And then before you know it, it's time to go.
Experts say that owners who form a clear succession plan are in the minority, that many don't plan at all or attempt to do so in a hurry. The result of a hasty departure, especially in the case of an untimely death, can have disastrous results.
"Having an exit plan in place is mission critical — the key word being plan," said Jack Fishman, president of Toronto-based Restaurant Exit Strategies Team. "For those who realize the time has come to take their leave, we recommend taking three to five years to develop an exit plan. That gives them time enough to optimize the value of the business, as well as time for tax planning and the transition and placement of executive teams."
Writing in his newsletter Exit Planning Review, professional exit planner and author John H. Brown notes eight ways to leave a business:
* Transfer the business to a family member.
* Sell it to one or more key employees.
* Sell to key employees using an employee stock ownership plan (ESOP).
* Sell the business to one or more co-owners.
* Sell to third-party outsider.
* Engage in an initial public offering.
* Retain ownership but become a passive owner.
Common to the pizza industry is an exit strategy with family members at the nucleus. In 2003, Dick Freeland, 67, president of a highly successful 44-unit Fort Wayne, Ind.-based Pizza Hut franchise, began implementing his exit plan to take effect when he relinquishes leadership within the next couple of years. Part of that plan includes the return of Freeland's only son, who will have been away from the pizza business for about 10 years.
Vic Cassano Jr., 61, also is keeping it in the family. The chairman of 36-unit Cassano's Pizza King, which includes a dough manufacturing facility in Dayton, Ohio, initiated his plan two years ago. His three children work in the business and share equally in 49 percent of its stock. When Cassano retires, his two sons, who currently oversee operations, will buy his 51 percent stake; his daughter opted not to increase her share.
"Ownership of the business will go to my children over a designated period of time, a period which began about a year ago," Cassano said. "When that time period ends, ownership will automatically transfer to them, and it can't be stopped. That's a good thing: whether you're alive, you're still working, or you've passed on, the arrangement continues. You can accomplish this while remaining in control of the business and until such time that you believe that your heirs are in a position — or have enough knowledge — to take it the rest of the way."
Cassano's father founded the pizza business in 1953 and sold it to Greyhound Foodservice Management in 1986.
Cassano Jr., who oversaw operations when his father sold the business, isn't certain why his father didn't sell the chain to him; he said his father never let him know the real details of his business. His best guess is his father wanted to detach fully from the company he founded by selling to an outside party. "That was his baby. It surely would have been hard to let go."
Ironically, Greyhound sold the company to Cassano Jr. in 1989, and over the ensuing years, as his own family became more involved in the chain, he knew he wanted them to own it. He vowed to himself to pass along Cassano's in an orderly fashion.
"Not having a plan in place borders on ignorance," Cassano said. "Those who think that this is not an important event, or is a non-event in their corporation, need to re-think their position. If they have any intention whatsoever of passing on their business in any form, and there's not an exit strategy in place, their kids may get the business when they die — but with penalties.
"With the death tax in place, the government requires you to pay the death tax in nine months after death of the owner. That will usually entail about 50 percent of the value of the company. Very few people are cash-flush enough to handle that, and chances are the heirs will put the business up for sale. And then you're looking at a fire sale."
Setting up the sale to minimize tax consequences calls for professional guidance, Cassano said.
"Some exit strategies have little or no tax consequences for the people you're passing the business on to," he said. But "for those plans, there will be some tax consequences to the owner, the person passing it on. But that usually comes from the Lifetime Unified Tax Credit Reduction, not an out-of-pocket expense."
Selling to an outsider sometimes is the best option if family members aren't able, available or interested.
In his book, How to Run Your Business So You Can Leave It In Style, Brown notes that owner-based goals for exit planning include creating and preserving the value of the company. When owners are the face of the company, their departure could send customers looking elsewhere. Ensuring the business will function as always is key to its survival.
An exit plan should include enough insurance to allow for continuation of the business. This provides some breathing room, especially if there is some unexpected fall-out at the time of transition. In fact, most lenders expect this layer of security before they'll help finance the purchase.
"As our pontiff Stephen Covey likes to say, 'Begin with the end in mind,'" Fishman said, referring to the author of 7 Habits of Highly Effective People. "Most business people don't do this. They charge in, doing what they do best, but they're not thinking about the future in terms of building a strategic model for maximizing asset value. The best time to get this on the radar screen is now."
Building the Bench
Bringing successors up to speed is a big concern. OI Partners-The McGuire Group, a talent management and leadership firm, surveyed nearly 300 human resources professionals attending the Annual Society for Human Resource Management Conference and Exposition in June 2006 to identify the greatest issues they are facing over the next 12 months. Developing leaders and succession planning was the second-highest concern among those surveyed. In 2005, respondents said that succession planning was most important to them.
"Whether you have a succession plan in place is the difference between you running the company and the company running you," said Francie Dalton, founder and president of Columbia, Md.-based Dalton Alliances, a behavioral science and communications firm. "A big part of the plan is preparing others to replace you. If you're not doing that, then you're essentially a prisoner in your business — there's no way out, or at least no plan. And being a prisoner isn't why entrepreneurs become entrepreneurs in the first place."
Communicating the strategy is important, whether to a board of directors, a high-level management team, or to heirs. Cassano involved his kids in the planning and construction of the strategy, and he's revised some of the wording along the way.
"You shouldn't keep this sort of thing a secret," Cassano said. "You involve the people for their benefit, and on your behalf. You work through the process together. It comforts them to know that they're working toward something, that they're an important part of the future of the company."
Laying the groundwork for that future is what transition planning is all about. And according to Cassano, it's work that needs done sooner than later.
"Last minute planning is a very bad thing," he said. "Any decision that you have to make under the gun is normally going to be a bad decision."
Six Steps for Succession
* Develop a people strategy: Succession planning in smart, effective companies is a finely tuned, systematic, and thorough process. Realize that the business or industry landscape may look entirely different in 10 years. Hiring plans should reflect the talent and skills that will be required to navigate successfully through that changing landscape.
* Check current strengths and weaknesses: Great organizations scrutinize their leadership's abilities, pinpointing weaknesses that require attention as well as strengths that can be used more effectively. Good succession planners closely watch, mentor and test the mettle of every viable contender for important leadership roles.
* Evaluate the gaps: Discern between a manager's skills and the requirements of more senior leadership roles. Top companies realize that exceeding goals in one job doesn't necessarily translate into success in another position. To weigh individual skills and traits that may predict success in higher positions, some companies have made very good use of behavioral and skills testing to determine suitability for a job.
* Plan and prescribe methods for bolstering bench strength: Organizations that discover a shortage of managers should establish urgent retention, recruitment and developmental initiatives to resolve the issue.
* Implement the plan: The most effective companies do not delay installation of the programs required to bolster bench strength and constantly monitor their progress against their goals.
* Cycle back and measure improvements: Companies must keep steady track of their key personnel strengths and weaknesses in order to evaluate accurately the viability of the succession plan and to make adjustments as required. Additionally, succession planning must also be on the agenda.