Only 1 in 7 business owners who go to market to sell to an outside buyer actually consummate a transaction, which is one reason why many owners choose to sell or transfer their ownership to insiders.
While an internal transfer is typically less complicated and can be less expensive than an external sale, there are still challenges that include:
- Deciding who will succeed the current owner as President or CEO.
- Grooming the successor to ensure they can handle their new responsibilities.
- Preserving and building the company’s value during the ownership transition.
- Providing a smooth transition for owners, successors, and key employees.
The premise of the HBO show Succession centers around the dysfunction of a large family-run corporation without a clear succession plan. It’s a satire, and it’s over the top, but the truth is… succession is a critical issue for closely held businesses. The odds of a family business transition being successful are actually quite shocking:
- 30% of businesses survive the transition to the second generation
- 12% of businesses survive the transition to the third generation, and
- Only 3% of businesses survive the transition to the fourth generation
These are worrisome statistics, so it’s worth exploring why closely held business ownership transitions often fail and what you can do to succeed. Even if you don’t plan on exiting your business for years, it’s never too early to start thinking about developing your succession plan as part of your overall exit plan.
The Common View of Succession, and Why It’s Flawed
Most people think of succession as the passing along of businesses, titles, assets, property, etc. – i.e., the inheritance. The problem is that many business owners see it in these simplified terms, and the reality is that it’s much more complicated than that. Situations where the business is merely passed down to the next generation have the potential to result in failure and chaos, especially when the situation is complex with no concrete plan in place.
A legal change in ownership is a formal transfer of wealth but it does not address important details such as:
- Can the new owner effectively replace the transitioning owner?
- Does the new owner have the desire, ability, and the other attributes necessary to garner respect and lead the company into the future?
Merely being the next in line to succeed the owner does not necessarily mean the person is equipped to be a true successor. In fact, many adult children may not even want to take over the business.
A New Approach to Business Succession
True business succession requires careful thought, planning, time, communication, training, mentoring, and most of all, the selection of the correct successor. Let’s consider a different approach to succession, one that more clearly represents what owners of multi-generation companies practice and understand. This definition involves setting and meeting specific milestones before signing the papers.
Succession is the act of replacing the business owner(s) through the following steps:
1. Create a situation where the owner is not needed for the business to successfully operate without interruption, regardless of the owner’s continued involvement.
2. Develop a capable, empowered, engaged management team and a sufficiently groomed and mentored owner replacement, responsible for the overall operation of the business without the owner’s direction or input.
3. Provide ample time, effort, and tools to develop necessary talent, which may require additional management team members.
So, what can businesses do to prepare for the future?
- Develop a strategic exit plan that acknowledges and addresses the ownership transition issues.
- Identify the best leaders for the organization.
- Implement a leadership development strategy.
- Create an advisory board to help the company and new leaders carry out the strategic plan.
The Takeaway
Proper succession planning, as part of your overall exit plan can help you accomplish a smooth leadership transition, as well as the financial and transactional components to ensure business continuity and that you can meet your personal financial objectives.
Michael Beck of Eliciting Excellence has developed a free Successor Readiness Questionnaire that can give you a sense of how ready your successor is to take over. It’s a great place to start as you begin to plan for your exit and passing the baton to a new owner.
Download a full PDF version of our book Cashing Out of Your Business – Your Last Great Deal for FREE and learn how to exit your business on your own terms.
