Succession planning is one of the most emotional corporate strategy exercises that a business owner will ever tackle. After all, it’s often difficult to consider stepping away from something so closely tied to your identity. It doesn’t help that there seem to be several common misconceptions in the industry that make everyone cringe… or avoid it altogether. However, dispelling these myths and examining the realities may make this necessary task easier to approach and accomplish.
Reality: We believe that business owners should start thinking about and planning for their eventual exit the day they open their business. Succession planning is just one component of your corporate strategy and it’s imperative to incorporate it into all the other aspects of your business (including your growth strategy), as they are intricately connected. Your path and plan will change over the life cycle of your business, that’s a given. But making this planning a regular priority for the business will ensure that when it is time to retire, you’ll have already done the hard work of designing a plan and thoroughly vetting all of your options.
Reality: Every business, no matter the size, will eventually transition. Without a plan, the question becomes, “Will I realize full value for what I have worked so hard to build?” Not having a plan in place almost guarantees that the answer to this question is ‘no’. Your plan doesn’t need to be perfect, but having something in place is better than having nothing. It’s unfair to your family, your staff, and your clients to not be properly prepared for this unavoidable event.
Reality: Monetizing your ownership position is completely different from retiring, and just because you decide to start transitioning your ownership, doesn’t mean you must stop working. That’s the beauty of a well-thought out and strategically executed succession plan – you can lower your risk, realize value for what you’ve built, and still do what you love. With an internal transition you can even gradually turn over control, allowing everyone sufficient time to adapt to the change. This type of planning isn’t done overnight though, so you must allow plenty of time (a minimum of 5-7 years).
Reality: You will only have the potential to realize maximum value by having an adequate plan in place. Not surprising, this includes taking the proper steps to address any firm weaknesses well before your planned exit. Many business owners often have a “retirement number” in their head representing a specific dollar amount that they want from their business or that they need to comfortably retire. Sadly, this very rarely correlates to the actual value of the business. But by taking the time to prepare and plan appropriately, the gap can usually be narrowed.
Reality: We’ve said it before: succession planning takes time. Sure, you can decide to retire one morning and be out the door the following week…. but you are not going to realize full value for what you’ve built. You’ll also increase the risk of an unsuccessful (and potentially disastrous) transition. Identifying successors/suitors, preparing staff and clients, and completing a transaction (think lawyers and formal paperwork) cannot be accomplished overnight. If you make succession planning part of your annual planning, you won’t need to rush the process – and you’ll allow yourself plenty of time to seamlessly exit at the most opportune moment.
Reality: If a sale, rather than an internal transition, is your desired (or required) exit route, the best time to sell is actually just before your business reaches the peak in its lifecycle (you’ll achieve maximum value in this scenario).
And if you think a sale is better than a transition, remember these points: an external sale is typically less risky and will garner a higher purchase price. But it’s also more emotional and immediate. With an internal transition, you’ll likely give your next gen a “leg-up” on the purchase price, but you’ll be able to remain involved until you’re completely ready to retire. Keep in mind, an internal transition also allows you to gradually sell your ownership in tranches (ideally, with non-voting equity being sold first). This allows you to adjust to the life change while simultaneously mentoring the next generation of leadership.
It’s ironic that advisors make retirement planning a top priority for their clients, yet fail to address it for themselves (more than 70% of advisors lack a formal succession plan). We get it, facing your own mortality isn’t exactly an enticing task – but it’s something that any responsible business owner must accomplish. With consistent and regular attention, succession planning needn’t be feared or avoided. If you haven't started yet, do it today!
More articles related to: Succession Planning