If all the ingredients that make a business successful are locked up inside the head of the owner or some other key employee, the value of the business will suffer and be at risk.

Succession Planning in the Small Chemical Company
One of the most important questions buyers will ask when considering the acquisition of a small chemical company is this: How important is the owner or any other key employee to the overall success of the business? If the business is overly dependant on one person, be it the owner or someone else, then the next question will be: How do I, as a buyer, protect myself if the owner or key employee dies after the closing, quits or otherwise loses interest?

Example # 1 - No Succession Planning - A chemical engineer leaves a major chemical company and starts his own business from scratch. After a period of 20 years, the business grows in sales to just under $10 million. The success of the business is largely based on the development of a series of unique, specialty chemicals by the owner without the assistance of other technical employees of the business. At the age of 60, seemingly in good health, the owner has a fatal heart attack. Without the technical expertise of the owner, the business loses much of its value. The owner's wife puts the business up for sale at a fire sale price.

Example # 2 - Too much succession planning - Much like in Example # 1, a chemist leaves a big chemical company and starts up his own business developing state-of-the-art specialty chemicals in a new, high-growth market. Recognizing that he needs to groom a strong successor to manage the business, the owner selects the right person for the job. However, the owner weans himself from the day-to-day operations to the point where he no longer has a feel for how the business is run. When the owner is in his 60's and tries to sell the business, the chosen successor effectively squashes 3 deals with buyers who are not to his liking, and then offers to buy the business himself at a low price.

Example # 3 - Owner grooms a team to manage the business, while at the same time staying involved in key decisions and directing overall strategy. In this example, the owner of a $15 million business anticipates a divestiture at some time in the next 5-10 years. He develops a management team of 3 other employees who are involved in the day-to-day management of the sales, technical and manufacturing functions. The owner weans himself of many of the day-to-day management responsibilities, but continues to be involved in key decisions and strategy direction, as well as meeting on a regular basis with his key people.

The owner in the first example has done nothing to preserve the business in his absence, and his estate bears the brunt of that mistake. The owner in the second example gives his successor so much responsibility that the owner himself becomes irrelevant and thus loses control over the divestiture process. The owner in the third example balances the needs of the business properly.

What can an owner do to anticipate a buyer's concerns and plan for the eventual sale of the business?

1. Make sure the critical parts of the business are known by more than one person, preferably a few. Groom key employees in the important aspects of the business-be it sales, purchasing, technical and/or manufacturing.

2. Reduce all technical know-how and any other intangible information to writing as much as possible. The owner in the first example had some of the key elements of the company's technology in his head. Clearly a disaster in the making.

3. Use the carrot and the stick to motivate and retain key employees. Good people are critical to a business and therefore critical to an owner who wants to realize maximum value in a divestiture. Pay them well and treat them well. Have them sign strong non-compete agreements. Offer incentives to align their interests with yours as owner. Make it hard for them to leave….golden handcuffs are good for the owner and the employee.

4. Obtain key-man life insurance where practical. This could be on the owner when he/she is a key part of the company. It could also be on other employees when they are key players.

From the buyer's perspective
When a company's fortunes are tied up in one individual, a buyer will very often structure a deal that calls for some of the purchase price to be paid after the closing based on some measurable goal that equates with a successful transition of the business to the new owner. A buyer should also use the carrot and stick approach described earlier. Employment contracts with key people are often called for. And key-man life insurance may also be appropriate in some cases for the buyer's protection.


Good people are critical to a business and therefore critical to an owner who wants to realize maximum value in a divestiture. Pay them well and treat them well. Have them sign strong non-compete agreements. Offer incentives to align their interests with yours as owner. Make it hard for them to leave….golden handcuffs are good for the owner and the employee.