There can be many advantages to selling a business internally, but there can also be some challenges. One of the main challenges is maintaining objectivity about the situation, including your potential successor’s capabilities and whether they align with the needs of the company. If you plan to transition your business internally, make sure that you take the time to properly evaluate your potential successor(s) and develop his or her business and leadership skills well in advance of when he or she will actually take over the business. Some managers are fit for future leadership, and possibly ownership, while some are not. Going from an employee to an owner is an interesting and tricky process that can be a challenge even for the most skilled manager.
Having the Conversation
You can’t assume your key employee wants to take on the risk of owning and running the business. Begin discussing a potential succession well before your desired transition date. However, be aware that having the ownership conversation with your identified successor may catch the person totally off guard. Don’t be surprised if he or she has a hard time wrapping their brain around what this means. Being an owner is riskier than being an employee, and not everyone has the entrepreneurial spirit, the necessary talent, or an understanding spouse who will allow them to take advantage of this incredible opportunity. The trick is to hire a key manager who thinks like an entrepreneur and has the confidence to run the business.
Identifying the right person to take over the business when you leave is a process that requires careful thought and planning. Here are some things that owners should do when considering their successors:
- Establish measurable criteria for assessing potential successors
- Identify suitable candidates
- Consider the interest level of those candidates you deem suitable
- Evaluate the candidates to identify gaps in the potential candidates’ skills and experience
- Create and implement leadership development plans for the top candidates
- Monitor the candidates’ progress on these plans
Considering the Financial Implications
Choosing the right successor for your business is a major decision and it will have a direct impact on your financial future. Most often, internal sales are funded through bank debt or seller financing, or by using the company profits to pay you over time. Choosing the wrong successor or handing them all of the reins too soon can limit the company’s performance and its ability to fund your retirement. When seeking a successor, it is often helpful to work with an outside advisor who is impartial, has no real stake in the outcome, and can help you objectively evaluate potential candidates.
Starting the Grooming Process
Grooming the successor in a small or family business is something that takes careful planning in order to be successful. A business owner and successor need to work together to define what the trainee will do, determine the scope and timing for their education or training, and how the evaluation process will take place. A successor should be placed in a responsible position in the business that has specific and measurable objectives. They should be educated in decision-making; leadership; risk management; dealing with people (management, employees, and customers); and handling stress – and evaluated along the way. As the successor moves through each phase, his or her responsibility should be increased as training and business goals are met and more rigorous goals should be established.
Don’t forget that transitioning the ownership of a business is an enormous transition for the owner, his/her successor(s), and the business. Change is not easy for anyone, but planning can lessen the pain. Don’t underestimate the human element and how much time and effort will be required to make this happen. “Overnight” ownership transitions are done out of necessity when an event, usually an unpleasant one, occurs. Don’t wait for something unpleasant to happen. Developing a plan will allow you to maintain control over this process, have the information you need to make decisions when necessary and positively impact the outcome.
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