Planning for a generational transition is something many business owners don’t think about early enough. Succession planning often comes up out of necessity due to a sudden injury or illness, but it’s not always a topic that’s strategically planned for in advance. Let’s change that! As strategic HR partners, we’ve learned some valuable things over the years about different approaches to transition planning in business. This insight will help you start thinking about the best way to structure your business and leadership strategy now in order to support an eventual planned (or unplanned) exit down the road, with the ultimate goal being for the business to thrive without you:
Let’s talk about the 5 most common generational transition strategies in a business:
1.You plan for your kid(s) to “inherit” your business:
Risks: Your kids may not be as interested or invested as you are in the business; the kids aren’t properly trained to take over; the kids don’t get along and disagree on how to run things; your long tenured employees don’t recognize your kids as leaders or don’t think they are qualified in the way that you were; your kids can make big mistakes due to lack of experience.
Rewards: You keep things in the family, your kids can still come to you for guidance and insight, you still feel involved and connected to the business you built.
Planning Strategy: Bring your kids into the business as early as it makes sense IF they are interested in taking over. Don’t bring them into a quick executive leadership role until they’ve done the time to learn the business, build relationships, and demonstrate commitment. If things are going well, increase their level of responsibility, pay, and visibility over time, with the goal being to help them work into leading gradually while earning the respect of your employees through the hard work along the way. You’re still there to guide them and help the rest of your team start to see them as a confident leader and decision maker. Over time your role and involvement can scale back while theirs scales up.
2.You plan to hire your next generation of leadership in advance:
Risks: If you don’t make the right hires far enough in advance you’ll struggle to transition the work and you’ll also struggle with getting your employees to accept your emerging leaders.
Rewards: Similar to the inherited approach above, choosing your next generation of leaders well in advance is a strategic way to ensure the continued success of your business. And in many ways this approach is easier because you can cherry pick the best person/people for the job. If you start thinking about this well in advance, then if you do get it wrong you’ll allow time to course correct which brings a lot of wisdom. Being able to choose your next generation of leaders and spend time helping them prepare to lead is a blessing for business owners who want to continue their company’s mission, but want to gradually phase out their responsibilities.
Planning Strategy: If you had to make a quick exit from your business tomorrow, do you currently have someone on your team who you’d feel confident leaving in charge? If your answer is “yes” then the next question is “how would this decision be received by the rest of your employees?” If your answer is “no” then this is both a powerful and motivating realization to make. The first step toward coaching your next generation leaders is to find them. Once you’ve identified who this is, the next step is to start bringing them into the parts of running your business that are less visible to employees. Then, gradually start to include them in the more operational and strategic side of your business, helping them learn how you think about making big decisions and helping them learn to spot risks and opportunities. Place strong emphasis on developing them as leaders, helping them be viewed as leaders by your employees, and on emphasizing important aspects of your company culture that matter most
3.You plan to sell your business:
Risks: Your idea of your business’s value doesn’t match the offers you get when you’re ready to retire.
Rewards: You get to make a clean break while also getting some money out the business you worked hard to build.
Planning Strategy: If you want to sell, it’s important to identify a practical way to evaluate your business’s value well in advance of when you want to sell. This way if the estimate you get doesn’t align with the offers you get, you’ll have time to address any shortcomings ahead of time. For example…is your software outdated, is your market overly saturated? In order for a company to be in a great position for a sale or acquisition your financials need to be in great shape, which means you need to be profitable, your books and tax returns need to be in excellent order, you want to highlight recurring revenue streams, and be running as profitably and as lean as possible to build confidence with buyers. Demonstrating the business’s ability to run without you is another factor that potential buyers will find attractive.
4.You plan to bring in a private equity firm:
Risks: PE firms are usually pretty cutthroat and balancing working for a PE firm AND a founder who is still trying to be involved is often really difficult for employees. You’ll also give up a lot of operational control over things like acquired debt, company culture, and inevitable restructuring.
Rewards: You get someone else to run the day-to-day, you get to take some of your “chips off the table” and get some immediate cash out of your business
Planning Strategy: Bringing in a PE firm is similar to the things we talked about above related to selling your business outright. You’ll need to get your financials in order 3-5 years before you plan to bring in a private equity firm; you’ll be asked to for access to your books (an audit is likely) and you’ll likely go through a due diligence period where an external party will evaluate you from a financial, contractual, and compliance perspective. You may also be asked to upgrade technology or systems to make yourself more appealing to potential PE firms.
5.You plan to sell your business to your employees through an ESOP:
Risks: Employee Stock Ownership Plans (ESOPs) are expensive to set up with out of pocket costs of over $100,000, they are complex (and expensive) to manage on an annual basis too, and they come with a lot of compliance rules.
Rewards: They offer amazing tax benefits and they’re a great way to allow your employees to build wealth slowly over time, maximize retention, and they offer the founder a lot of control over how they plan their eventual transition out of the business.
Planning Strategy: Before you’re able to turn your business into an ESOP, you’ll need to go through an extensive feasibility study that will help determine if this option makes sense, and if you meet the requirements. You’ll need to partner with external advisors for help with a company valuation and for help designing your plan and you’ll need help with securing financing and submitting to the IRS for approval. This process is time consuming and there are a lot of barriers to overcome along the way. The initial feasibility study will ultimately tell you whether this option is worth the time and money involved, and if it is – then it will also help inform the timeline for your exit. If you want to go this route, starting the feasibility study 3-5 years before you want to exit the business is a good time frame.
