In the article that precedes this one, MANA President and CEO Charles Cohon takes aim at the subject of succession planning. As he draws upon real-world examples of why succession planning is so critical and addresses many of the how-to steps to take in order to get the job done, it’s worth noting that MANA and Agency Sales magazine have for years espoused the critical benefits of planning, forming and executing an effective succession plan.

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More than a decade ago, under the heading of “There’s No Success(ion) Without a Plan,” this publication pointed out that the existence of a workable plan is…

• …critical for the owners of an agency if they plan on the firm operating successfully well into the future.
• …of prime importance for principals that deal with the agency. Those principals have a vested interest in knowing that the agency that they’re going to market with has a plan to professionally and efficiently serve the territory and to maintain customer relationships long after current ownership has exited the business.
• …an integral ingredient of any agency business plan — and hasn’t MANA stressed the importance of business plans for years?

While the above are important considerations for agency owners, it’s a safe bet that customers, employees and manufacturers have more than a passing interest in an agency’s future plans. Perhaps manufacturers are more concerned since customers and employees have more, quicker and easier options if there are no future plans. Even in a tight job market, good salespeople have value and customers always have options.

Manufacturers’ Concern

The typical manufacturer that has cast its sales and marketing lot with independent manufacturers’ reps is apt to be very concerned as to whether a sales team will be still there in five to 10 years. Those manufacturers would certainly want to be sure that the adequate steps have been taken in order to assure a smooth succession, with no disruption of business. That’s why — as Cohon emphasized — it’s important to decide when and how to proceed.

As previously suggested, a five-year period might be the best lead-time when it comes to preparing for a business exit. In any event, the answer to the question “When do you want to leave the business?” will point the seller in the direction they want to take when it comes to preparation. If the answer is a year or less, there are strategies you cannot implement if you expect to see the results manifested prior to marketing the business. However, there are plenty of things you can do in a short time period. Cleaning up your financial statements is one of those things. Eliminating the excessive blending of personal and business expenses is something that’s easy to do. Banks and buyers like to see a healthy bottom line, and the extra tax you pay will come back to you in multiples.

Preparation Is Key

It’s not unusual for buyers and banks to want to see financial statements and tax returns from the recommended five-year preparation period of time. It allows the business the time it needs in order to show the effect of any strategies that have been undertaken as part of the preparation process. Preparation might very well be the key word here as preparing properly allows the agency owners to reap the following benefits:

• Much of the work that is done to prepare for an exit or sale improves the business, so the owner benefits over the years prior to exit.
• Banks and manufacturers will view the effort in a positive light in that it should open up financing and provide additional lines for an owner to sell.
• It also prepares the agency in the event a catastrophic event hits. The agency won’t be forced into a panic sale or liquidation.

No planning is complete without a team in place to get the job done. That’s why it’s so important to have reliable counsel in the presence of proper legal, business and accounting advice.

Who’s the Buyer?

Next is the question: “To whom are you interested in selling the business?” Is it family, staff, or an outside buyer? If it’s an outside buyer, is it an individual, equity group, or another rep firm? These are important questions and often are not considered. What you do with the business could very well differ depending upon the logical buyer.

Consider, for instance, if the buyer is a family member or employee. If that’s the case, then part of the succession plan may involve coaching and training them on running the business.

If the path followed is not to a family member or employee, then chances are the tactics will be different. An outside buyer, for instance, certainly wants to be assured that profits will continue and that systems are in place to make the transition smooth. Above all, they do not want the business to be overly dependent on the owner. To put it another way, they want high company goodwill, not high personal goodwill.

Financial buyers should be considered as those who need a salary and profits, and they usually want to be the company president and decision maker. Strategic buyers often are in the same or a similar industry; they care more about growth, management capabilities and the ability to absorb overhead.

As MANA’s top executive emphasized, valuing the rep firm remains an important consideration. The answer to the simple question “What is the agency worth?” is not as simple as the question. In general terms, the value of a business is a function of the business’ profit. Usually, the higher the profit, the higher the value of the firm. Profit is a term that has different meaning to different people but a business appraiser will typically determine profit by adding together the net income on the tax return, plus the owner’s salary and owner perks, and then simply subtracting a fair market management salary for the running of the business.

Charley Cohon went into some detail when it comes to valuing the rep firm and that’s a subject worth revisiting by re-reading his article.

Informing Manufacturers

But a final consideration when it comes to succession planning might very well be that of communication. It can’t be stressed too much that involving the agency’s principals in the planning process is incumbent upon the agency owner. As Agency Sales and the association have underscored in the past, sharing plans might be a difficult matter since many manufacturers may not want to hear that you’re ultimately leaving the business. But failure to do so will cause them to cast considerable doubt on your abilities as a professional businessperson. The important consideration here is to have a well-thought-out plan in place. Once that’s done, share it with principals and ask for their feedback. Gauge their reaction and be open to their suggestions when it comes to moving forward.

MANA welcomes your comments on this article. Write to us at [email protected].