SMT - Don't Leave Succession Planning to Luck

When an entrepreneur starts an EMS company, the last thing on their mind might be how they plan to exit the business. Successful businessmen and investors know, however, that you never get into a business without knowing how to exit. We may choose to procrastinate planning for the inevitable, but all private business ownership is transitioned one way or the other. Most transactions are done poorly, and the value of the business suffers. If you wait until you must sell, it's too late.

Those who plan are more successful than those who don't. It sounds so simple and logical. So why don't people do it? The usual reply is, "I will do it as soon as I get the time."

There are many aspects to transitioning a business successfully, such as clear goals and objectives, business and equipment appraisals, legal agreements and deal structure, tax planning, wealth management, and understanding industry trends and niches, just to name a few. In this article, I will focus on succession planning, which lays the structure for the other elements. The other elements will be covered in future articles, and you also can contact me anytime for advice.

An EMS business owner may be planning to pass the company on to the next family generation, but this could render significant tax consequences if you don't set it up right prior to the transition. Selling an EMS business is dependent on the readiness of the company and the market conditions. If you are planning on living forever, or if you know the exact date you will be leaving this earth, you can certainly put this off until later. For the rest of us, let's not leave it up to the courts and Uncle Sam to decide who gets what.

Improving Value
You would never consider buying a piece of real estate without having a detailed survey performed. The same is true of your business. You should also know what parameters in your business affect its value. The purpose of doing a quality valuation is not just to get an opinion of dollar value; more importantly it should disclose all the tangible measurements to determine where your business is above and below the norms in our EMS industry. We often get blinded by the day-to-day pressures to get product out the door, so that we do not take the time to check the health of our EMS business as an investment in the future.

Take the time and small expense to evaluate the metrics your eventual replacement owner will focus on: customer concentration, inventory turns, purchasing efficiency, industry niche served, employee retention, debt structure, technology and process continuous improvements, and capital investments. Do the valuation periodically during the life of the business so you know where to make changes. You will have a yardstick to measure results. Keeping your ear to the ground with industry trend reports will help you avoid getting stuck supporting an industry that is declining in your part of the world.

Exit Strategy vs. Succession Planning
To some owners and many investors, the term "exit strategy" implies knowing the peak time to "exit" a business, hoping to obtain the optimal personal financial return. However, getting out before the bottoms drops out may not give the employees and customers a warm feeling about their future. Projecting the company value after an acquisition will attract a more premium price. The sooner you groom your replacement and put your executive team in place, the sooner you will have security for your employees, customers, and investors. Recall the Boy Scout philosophy: "leave the camp in a better condition than you found it for the benefit of those that come after you." Actually, this makes sense when it is time to sell a business, because the buyer is going to pay a premium price for the operations if they feel there is a bright future for the business. No one wants to buy a business that has topped-out. You get more for a business that is growing than one that has past its peak. Smart business owners work themselves out of the day-to-day and hands-on operation so that they can see the horizon and do the strategic planning. For these companies, death, retirement, or illness of the owner will not cripple the business and transitions are less disruptive.

EMS Outlook
For the most part, the EMS industry is alive and well. The niche markets are providing business owners the ability to make good margins. The focus on core competency continues to move OEMs to the outsourcing model. Valuation multiples are still good, but not as high as last year, among a slowing economy and tougher financing terms. There are good deals to be had out there.

Gary A. Tanel is an SMT Editorial Advisory Board member, SMTA Dallas Chapter President, and Senior Vice President of the Associate Equity Group. He is the chairman of the Dallas M&A Forum. Gary can be reached at (972) 751-0700 x203; GTanel@AssociateEquity.com.

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