Tips for Success in Business Succession Planning

Written by Greg McLaughlin, CEPA

A critical and often overlooked aspect of owning and running a successful business is planning for its future after you retire or shift your focus to other opportunities. This succession plan or exit strategy lays out how you will pass down the business to the next owner and the processes involved in this transition.

It is wise to start thinking about your exit plan early in the life of your business so you can make decisions with your end goals in mind throughout your career and position your business to maximize the probability of longevity and success.

Family Transition
Family-owned businesses usually have a vested interest in keeping their company within the family by passing leadership roles on to a member of the next generation who can maintain the family’s legacy and manage generational wealth. You may pass on the business as a gift or an advanced inheritance, or you may sell it at full market value or at a discount. Gift tax rates may be applicable for discounted sales or gifting, so be aware of your state’s regulations when making this part of your plan.

Not every family member will be suited for or want a leadership role in the family business. The first step in a smooth family business ownership transition is communicating with your family members about their professional interests and goals, skills, and willingness to take on a leadership role in the company.

If you know early on that you plan to keep your business within your family if possible, you can talk to your children and other family members at length about your role in the business and gauge their interest in taking over from you one day.

Choosing a successor can bring up complex emotions for all parties involved, and important business decisions run the risk of being influenced by familial dynamics outside the professional sphere. However, with careful planning, transitioning ownership of the business within the family can be immensely rewarding.

Once you have identified the best candidate, you can focus on mentoring and training your successor to ensure they understand the requirements of the role and can continue the business’s legacy and carry on the family’s professional values. In addition to teaching them the daily tasks and responsibilities they will be expected to assume, you should discuss your leadership philosophy, family values, and long-term goals for the business.

You may also choose to stay on the business’s payroll in an advisory capacity to facilitate a gradual transition.

Internal Sale to Employees
If no qualified family member is available or interested in taking on a leadership position but you still want to prioritize maintaining consistency in the company culture and processes, you may consider selling the business to a current employee.

With this option, the new owner will already have experience working in other areas of the business and will have had time to build relationships with your existing team. This can contribute to a smoother transition for the new leadership and the other employees.

However, the skills needed to be an excellent employee are not necessarily the same as those required to be a successful business owner, and this disconnect can pose a risk to the business.

When considering this approach, first identify longstanding employees or those who have shown exceptional potential for growth within the company. Speak with potential candidates to learn more about their professional aspirations and whether they would be interested in committing to long-term growth and advancement within the company.

Once you have identified a strong candidate, begin to train and mentor them to prepare them for their new role, addressing any gaps in their current skills and knowledge. Then, identify the business’s market value and decide how you will conduct the sale. When selling to an employee, consider that they may not have sufficient cash on hand to pay for the business upfront.

You will likely need to be flexible regarding the payment structure such as by selling in installments, having your buyer work with a third-party lender, or creating an employee stock ownership plan.

Sale or Merger with an Industry Competitor
Another exit planning strategy is to sell the business to a competitor in the industry looking to grow its market share. This can introduce some risks and legal considerations from which you need to protect yourself, possibly by preparing a nondisclosure agreement with prospective buyers while they gather information to determine whether they want to purchase the business.

You should also consider obtaining a professional third-party valuation for your business to help you determine how much you can reasonably expect the buyer to pay.

Merging with a competitor often entails bringing together two distinct company cultures. This can cause conflict when handled poorly, so ensuring cultural alignment and establishing a vision for the future is essential in ensuring success after the merger.

If your business has strong branding or a loyal customer base before the sale, it is also important to consider how the transition could affect the business’s reputation and how to preserve loyalty and bring customers along with the new company.

Clearly communicating with the public about what aspects of the business might change and what they can expect to remain consistent will play a key role in maintaining its strong reputation.

Private Equity Sale
A private equity sale involves selling a stake in the company to private equity firms, often to the extent that the original owner is no longer the majority stockholder in the company. This can bring new capital and fresh perspectives, driving innovation and expansion.

Additionally, private equity investors may bring in new leadership to optimize business practices in an attempt to increase the business’s profitability. In a sale like this, you can choose to retain minority ownership of the company or transfer your ownership completely. This flexibility gives you the option of staying with the company as a partial owner while still removing yourself from involvement in daily operations and responsibilities.

Before agreeing to a private equity sale, business owners should evaluate their long-term goals for the business and ensure they align with those of the potential buyers. Selling a business to any buyer necessitates relinquishing some or all control over the business, so it is important to choose a buyer whom you believe is capable of carrying out your business’s mission.

Conclusion
No matter how or to whom you sell your business, you won’t get anywhere worth going without planning in advance. Compare the types of succession plans in this article to your own priorities and goals for the sale, and create a strategy for how to get what you want for yourself and your business.

Once you’ve defined your goals and strategy, you can sell your business with confidence.