Establishing and building your business has been a labor of love. Whether you have owned and operated it for three years or 30 years, your hope is that it continues to thrive and serve its customers.
And as much as you may want to work at your business forever, the truth is you cannot. Consequently, you must make plans for what happens when you are ready to retire.
Many entrepreneurs plan to turn over their business to one or more of their children. Others may plan to hand the reins to another family member or sell the business to a trusted and treasured employee.
Regardless of your wishes, it’s best to get help with your succession plan from a professional.
Effective succession planning involves building the value of the business during your period of ownership and management, and having a plan in place when you are ready to step down. It means that management authority and control are delegated responsibly. Finally, it means that the benefits of ownership are fairly distributed to those who are entitled to them. It begins with an analysis of your answers to the following questions:
How old are you? How is your health? How and when do you plan to retire?
How old are your children? What exposure have they had to the business? How would you rate their business acumen and leadership skills?
Do you want to keep the business in your family?
If not, then what is your exit strategy? What estate planning steps have you taken to manage the proceeds of an eventual sale?
If the business is to stay in the family, then which family member(s) would you select to control it? Are they truly committed to the long-term business objectives of the company?
Is there a need for transition management involving non-family employees?
If you sell the business to your children or other family members (or even to your employees), how will they finance the purchase? How will you get the liquidity or proceeds that you need to live comfortably during retirement or to meet your estate-planning objectives?
If you choose to transfer the business as a gift (or at a price below fair market value), how can you be fair to “non-active” children and protect the business from their demands?
What continuing role do you envision for yourself?
Will your withdrawal be partial or complete, and what will your timetable be?
The bottom line is that succession planning is a process that involves many steps, including (1) acceptance of the task; (2) building consensus; (3) choosing the proper candidates, options, and strategies; (4) clearly defining roles; and (5) monitoring the plan to ensure its effectiveness.
There are several ways you can achieve a smooth and orderly transition. Among your options:
Transferring ownership to family members.
Sale of your equity to remaining co-founder(s).
Sale of some or all of your equity to employees.
Sale of some or all of your company (either a portion of the equity of a spin-off of a particular operating division of your business) to a competitor, strategic buyer, or investor.
Sale of a significant portion of your company to the general public through an initial public offering.
Implementation of a creative transition strategy, such as franchising, licensing, or joint ventures.
How do you choose which strategy (or which combination of strategies, because certain strategies are not mutually exclusive) is best for your business? Many factors will influence your decision, such as:
Your business strategy and personal financial objectives and retirement needs.
The availability of a viable family successor.
The presence of co-founders or minority shareholders in the company.
The pool of key employees who are interested, capable, and financially qualified for ownership.
Trends within your industry.
The valuation of your company and the status of the financial markets.