Moss-Adams Business Owner Succession Services -- Steve Schein
Q: What shaped your view about the need for developing succession for private and family businesses?
A lot of firsthand experience. I seemed to have naturally gravitated toward this area. I've had a lot of partners and have gone through a lot of changes. I have often been the one that has tried to facilitate the dialogue so that we're trying to come out with a good outcome. That requires a certain amount of listening and giving and receiving feedback. There's a decision-making model that comes out of it.
That's why it's so interesting playing my current role.
Q: How difficult is it for the leader of a private business to let go of the reins?
The process of a founder letting go is a big challenge. Maybe I represent an example of how it can work out pretty well — — to let go and give other folks opportunities to grow and be challenged and realize their potential.
Q: What are some of the considerations to assure orderly transition for someone who has run a family business for many years?
Business owners are in varying stages of preparedness. Depending on your level of financial information, how good is your internal financial reporting? What type of analysis are you doing on your numbers? It really changes drastically depending on the size of the organization. Have they ever done any planning? Do they have an organizational chart? Do they have a mission statement? Do they have goals? Do they have a budget? Do they do forecasting? Do they invest in internal training? It starts with trying to get a baseline of where the company is now and where it's been.
Some companies could have been doing a lot of planning and have great financial reporting and forecasting and have a well-thought-out organizational chart. Other companies are completely making it up as they go along.
Then you look at: Who are you? What is your unique position in the marketplace? Why do you exist? Who are your customers and why do they need you? Out of that comes where you want to go. What is your unique value proposition?
What's your personal definition of success?
It can be to make as much money as possible because you want to go on all these great vacations or buy new cars or pay for college education for five or six children.
It can be that you want to make a certain amount of money, but you want to have a little more free time. It can be: I'll work like crazy for five years and then I want to go half time because I want to pursue other things.
That personal definition of success needs to get out early in the process so you can say, What do I want to do with this company.
Once you know where you've been, who you are and where you are going, then you start answering how are you going to get there. That's where management succession and ownership transition comes into play.
Q: What are the critical elements in succession?
In the case of management succession, it involves identifying your successor or successors. Which children are going to be involved in the business on a long-term basis or key employees or partners.
How much responsibility are they prepared to take now. What might be a road map to their own career development. In the case they're not there, they need to look at some kind of ownership transition. Often selling your business involves valuing the business and valuing a privately owned company is a very important step. Often an owner has one idea of what their value is, but you need to take into account many factors that an outside evaluation would take into consideration.
Q: How is the value of a privately held company established?
There are a lot of different ways to establish value. I have bought and sold a lot of companies based on a multiple of earnings. You have three or five years of your trailing actual earnings. You have to clean up your financial numbers in a privately held company and that means doing a certain amount of adjustment so you can project forward. Then you can take some multiple of earnings — from one times earnings to 20 times earnings. If your business makes $200,000 a year, it might be worth anywhere from $500,000 to $1.5 million, depending on the type of business, growth potential and barriers of entry. During the dot-com era some companies had no earnings and were valued on a multiple of revenue.
Clearly, there are a lot of formulas and approaches. Sometimes it can be a function of the tuck-in value. In other words, if I'm a competitor and I'm bigger than you, your company might be worth more to me than to an outside third party because with your customers and your technology I might be able to leverage it and produce geometrically greater earnings. There's synergy where I might be able to drop a greater portion of your revenue to the bottom line by tucking your operation into mine.
I like focusing on the human component here. These are all individuals involved in the company with diverse goals and aspirations. I like to take those into account and not just look at any one component in a vacuum.
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