Ensure business stability with succession planning

When the CEO of an injection molding company passed away unexpectedly, it devastated his family and led to significant upheaval in his business. This particular CEO had run his organization for more than two decades and was still heavily involved in day-to-day management. His children received financial benefits from the company but had no involvement in operations and were unprepared to take over. Further, the rest of the management team was in their 60s and 70s and contemplating retirement. With no succession plan in place, the company's leaders and the CEO's family had little choice but to sell the business.

While this was a satisfactory outcome in the end, advanced planning would have put the family and company leaders in a position to consider more options, which could have benefited them financially and also ensured the business maintained its strategic trajectory.

Unfortunately, this lack of preparedness is common in the plastics industry, and it can create long-term risks. Plastics manufacturing leaders need to plan proactively for the next phase of life to ensure longevity for their organizations and security for their families.

It's understandably difficult for an owner to contemplate the day when he won't be involved in his business. After all, the owner has built the operation from the ground up and is personally wedded to the success and failure of the enterprise. Thinking about the end is not a priority when there are so many immediate issues to tackle. However, business owners in the plastics industry need to do away with this mindset.

Proactive succession planning can pay dividends for plastics manufacturers. I worked with a foreign conglomerate that was looking to sell and left sufficient time to prepare. We determined that it would be difficult for the global company to sell as a whole. Given the different cultures and nuances of each region in which it operated, there was no single company that was a natural fit to acquire this global firm. So, we divided the company into geographical units and sold these divisions independent of one another. This took time, but thanks to advanced planning, the company was able to find the appropriate strategic buyers to drive sustained growth for each piece of the business.

Talent recruitment in the plastics manufacturing industry is a persistent challenge, but it is essential to business longevity. As manufacturers have sought to differentiate themselves in the marketplace and maintain competitiveness, they have moved away from commodity "shoot and ship" products and toward more complex products, which has elevated the skills requirements for employees and compounded talent acquisition challenges.

In addition to recruiting the skilled workers for the plant floor, leaders also need to work to identify and groom future executives as they think about business succession. If these individuals don't exist within the company today, it's important to adjust hiring criteria to account for both the technical and leadership skills needed to address the company's future demands.

Fortunately, companies that put effort into strategically building a robust workforce with top talent often enjoy the added benefit of strong employee engagement, which is key to an eventual business transition. Engaged employees have a strong sense of pride in the company's work, which can help maintain stability even amid organizational change.

When it comes to business succession, plastics manufacturers have options.

Owners can of course pass the business down to the next generation. If that is not a preferred route, an owner can sell to a strategic buyer or private equity. Both options can provide the owner with meaningful financial liquidity, though they can create uncertainty for employees since new owners or investors may seek cost savings and synergies.

Other options include management buy-ins or an employee stock ownership plan. While these options do not allow an owner to fully monetize the business, they do allow the owner to share stakes in the business with employees and the management team.

While there are pros and cons to each option, business owners that plan ahead will have the full array of choices available to them, increasing the chance of a successful outcome for the business.

For plastics manufacturing leaders, business succession can be a difficult subject to address. But it's necessary in order to ensure long-term business stability. By being proactive about planning, a plastics manufacturing leader can focus on day-to-day business needs with the confidence that his organization, employees and family are protected.

Thomas Davenport is a director and leader of the industrials practice for Sikich Investment Banking. He has more than 15 years of experience in investment banking and financial advisory services.