Passing leadership of a business to the next generation requires extensive planning. Owners should treat the transition as a business sale by ensuring proper accounting and transparency. This establishes the business valuation. It is also important to surround yourself with professionals like attorneys and accountants who specialize in your industry. Finally, early and frequent communication is key to avoid potential issues with successors and ensure a smooth transition.

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PASSING THE
LEADERSHIP
BATON Avoid the
Gold Watch
Retirement Gift
By Samantha Park
L
et’s begin by establishing “passing the leadership baton”
as a bit of a misnomer, it’s more like a bomb that could
completely disintegrate everything you have worked
so hard for over the past thirty-five years if handled
poorly. You know, the kind of crudely made bomb you see in
movies that use a fancy gold-plated watch as the countdown
timer that turns out to be the ‘bombers’ retirement present (1994
classic Speed, anyone?). But hey, this is the alarm business and
if there is one thing we know, it’s our way around some colorful
wires. Passing the leadership baton is a term commonly used to
describe a pivotal moment, which you’ll find out can actually take
years, of transitioning a business to the next generation. While
‘generation’ can be literal, as in S.C. Johnson and their impressive
five-generation span of ownership, it can also be figurative such as
new leadership from an outside buyer or succession that involves
a longtime, trusted employee. If you’re thinking, “I’m not retiring
or selling for another five to ten years, I don’t need to worry about
this yet,” you are exactly who needs to start preparing now.
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When considering 90 percent of businesses in the
United States are family-owned or operated, combined
with the large scope of the baby boomer generation
that is solidly within their retiring years, the process
of passing the leadership baton is likely to hit the
majority of American businesses over the next 10-15
years. Succession planning should be top of mind
for ESA members regardless of the life cycle stage of
your business. The electronic security and life safety
industry, which is overwhelmingly comprised of
family-owned or operated organizations, will be facing
this typically once-in-a-lifetime event very soon. Our
industry represents the very backbone of the American
economic engine, and we are about to find out the
trade-in value. No pressure.
Sell, Sell, Sell
If multiple experts told you the same thing, you would
listen, right? The Electronic Security Association
caught up with ESX “Passing the Leadership Baton”
session panelist Jeremy Bates, president of Bates
Security, session moderator Robert Few, director of
Charter Communications IntelligentHome, and John
Colehower, principal of Mergers & Acquisitions L.L.C,
a consulting firm that specializes in the electronic
security industry; and they each advised the same
‘best practice.’ No matter the situation, set your
business up for sale. Few explains, “Whether you
are selling, transitioning to the next generation, or
handing over to your star employee, you need to start
in the same place and that is getting the business in
order.” A common misconception that can occur in
traditional alarm companies is treating the transition
as an overly informal or negligible process than if the
party acquiring the business was an outsider buyer.
In a familial succession, it can be easy to forgo the
formalities, adjust the nameplate on the president’s
office door to read ‘Jr.’ and call it a day. “First and
foremost, you want to make sure your business is
intact, running smoothly, and that you can report out
on everything.” This begins with proper accounting
and full transparency into what money is coming in
and going out, including contracts, and the bread
and butter for alarm businesses, your RMR. This
step substantiates your valuation; it is a price that is
figuratively priceless.
Depending on the size of your business and the
structure of your sale, an outside accountant reviewing
your books may be a wise decision. Colehower clarifies,
“For small, tuck-in acquisitions where the buyer is
simply purchasing alarm monitoring accounts and
little else, the seller’s accounting (other than being
able to prove the RMR it collects) may not matter to a
buyer. However, when the seller is looking to obtain
value for its service revenues, it will need to be able
to demonstrate the profits that it makes from that
portion of its business, and more detailed accounting
will be required. For sales of an entire business, where
the buyer is taking over the seller’s operations, office
locations, employees and vehicles, the buyer will
require detailed accounting records over multiple
years. In those situations, reviewed and/or audited
financial reports will certainly lend confidence and
result in a greater sale price. As a business scales up in
size, it needs to move from QuickBooks to mainstream
industry software in order to generate reports for
management, lenders and potential buyers.” Taxes
for the sale of a company are a headache, actually
all taxes will make you reach for the extra-strength
Excedrin®, but they make the world go ‘round so
they are an important aspect of succession planning.
Generally speaking, the check you cut to Uncle Sam
differs depending on your corporation status. An
‘S’ corporation is an entity that, through a special
IRS tax election, minimizes taxes in asset sales. This
can also be said for LLC’s or sole proprietorships.
‘S’ corporations defer to their shareholders when it
comes to “corporate income, losses, deductions, and
credits” according to the Internal Revenue Service
(IRS), “shareholders of S corporations report the flow-
through of income and losses on their personal tax
returns and are assessed tax at their individual income
tax rates.” While there are stipulations to qualify
for this business structure, the advantage is singular
taxation. During a ‘C’ corporation sale, taxation
occurs at two levels, corporate and individual. “For
any ‘C’ corporation owners who are considering a sale
of their business, it is strongly suggested they consult
with their accountants about changing their ‘C’ status
to an ‘S’ election. It can take years to accomplish
this, so the sooner you start, the better. A method
commonly used to avoid double taxation is a sale of
the company’s stock instead of assets, but buyers have
additional liability and tax issues to contend with,”
says Colehower.
Surround Yourself with the Right
People
Unless you happen to be a mergers and acquisitions
professional, selling a business is something few have
done before. Entrepreneurs like small business owners
may be tempted to take a crack at it themselves but
having a team of professionals on your side is a best
practice that, if ignored, can cost you. The ideal team
will consist of an attorney, accountant, and business
consultant, preferably who each specialize in the
electronic security industry. In Colehower’s vast
experience, “Good industry professionals add a great
deal of value to a seller in helping them negotiate the
terms, maximize the price, find a compatible buyer,
and protect them from hidden adjustments and veiled
contract provisions… the business consultant conducts
an initial due diligence to get the company ready for
sale, markets the company in a professional manner, and
negotiates the business terms. The attorney reviews
and advises on the buyer’s purchase documents and the
accountant structures the transaction to achieve the
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best tax result. In the final analysis, most sellers have
spent years building up their business and only get one
opportunity to cash out, so they should do so with a
professional team.” A common misconception is that
running a successful business equates to selling one.
“Without the assistance of an objective third party,
you don’t know what you don’t know. It would be like
having a lawyer install an alarm system…, we all have
our own skill sets,” says Colehower.
With a team of talented professionals behind you, it’s
time to look to the future and that is your successor
and their preparation. Bates Security is doing just
that with their current generational transitions from
mother and father to sons. “In our case, our parents
plan started with making sure that my brother and I
learned the company from the ground up. Between
the two of us, we have worked in every entry-level
position in the company and were never given any
preferential treatment. We had to earn our way just
like anyone else and had to demonstrate we had the
work ethic, desire, and ability to learn and grow with
the company. In short, we had to prove ourselves as
we went along and accordingly were given more and
more responsibility to where now we are running the
company with little involvement from our parents.
We are all working hard to grow our businesses, this
valuable asset, and if a plan is not put into place to buy
the current owners out or put in place some type of
estate planning, then an untimely death can jeopardize
the business. Involve expert attorneys and financial
planners to develop a plan that works for your family
which is what we did. This area is the part that is easy
to put off, which is a critical mistake,” explains Bates.
As with many family businesses, structured long-term
payouts and estate planning come into play and it is
vital to note that a ‘handshake’ agreement is not valid
or wise. The family aspect adds personal dynamics that
can take misunderstandings straight to a courtroom.
A Lack of Communication is
Costly, How Much Can You Afford?
Communication or lack thereof, is directly indicative
of your businesses sustainability. It’s a fairly simple
concept that is underestimated but easily rectified.
In terms of the most valuable asset in your business,
which is your people, a best practice is to exercise
communication early and often with an objective of
appropriate transparency. Communicating with your
chosen successor can avoid situations of unanticipated
disinterest or top talent defecting to competitors.
At this level of the business game, your competition
knows the players. If you have been grooming a
replacement for 15 years, teaching them the ins and
outs of your business, without communicating the
end goal of them taking over, you run the risk of them
slipping away to another organization; to a company
that was clear in their desire to have your protégée run
their business when you failed to do so. That’s 15 years
of work you won’t recoup any revenue on. Worse yet,
may be assuming the next generation of your family
wants to continue your business when they actually
want to venture out and do their own thing. Less than
50 percent of family businesses survive into the second
generation followed by only 15 percent surviving into
the third generation. This supposition can leave you
with a team full of disgruntled employees who were
passed over for the son who doesn’t even want the
company, tense family dinners because the nephew
that did want it left to work for your competitor, and a
passport you can’t seem to fill with stamps because you
are on speed dial with the office you were trying to get
away from.
Costly doesn’t begin to describe this nightmare. Making
sure everyone is well-informed instills a sense of loyalty
among employees and reassures investors, supporting
leadership, shareholders, and family that the succession
plan is effective and on track. Family or not, assessing
if you have the right person to take over your business
centers around one trait; passion. Few explains, “You
need passion. Forcing passion on the next generation,
where passion isn’t there, will lead to a failed business.
In running an electronic security company, you’ve got to
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5. be passionate about helping people. You’ve got to be passionate
about taking care of your customers and growing your business;
without these three things you’re not going to be able to run an
effective and customer-centric business.” A talented accountant,
a dynamic sales team, a results-oriented marketer are all hirable
but passion is an innate characteristic that cannot be taught. If
your successor has this, your baton will safely rest in their hands.
Passing the leadership baton to the next generation, family
or not, is a test of your skills as a leader, businessperson, and
individual. It will challenge your resolve but also serve as your
legacy and reward for a lifetime of hard work. Just remember,
start planning early, set your business up for sale regardless of
the acquiring party, surround yourself with the right people,
and communicate early and often to ensure your business can
sustain for generations to come. Rather than a gold watch to
commemorate a successful ‘passing of the leadership baton’
and retirement, opt for a seven-day cruise. 
“COMMUNICATION
OR LACK THEREOF,
IS DIRECTLY
INDICATIVE OF
YOUR BUSINESSES
SUSTAINABILITY
”