Selecting the Best-Suited Successor to the Business Owner
Every exit path requires a solid planning and implementation foundation. At the cornerstone of a functional Exit Plan, your job as the business advisor is to help select the best-suited successor to the business owner so that the business can live on after the owner exits.
In a Forbes article that discusses choosing a business successor, it’s noted that “The intent of succession planning is to “future-proof” the business - by developing a strategic guide that builds upon the leader’s vision with a focus on a sustainable scale and continual growth for the future.”
However, it’s hard to guide an Exit Plan in one direction or another without taking the time to pick a target successor. Compared to the lists of possible departure dates or the variety of lifestyle needs at retirement, the list of possible successors may actually be quite short:
- A child, children or other family member
- A co-owner(s)
- A key employee (or key employee group)
- An unrelated third party
- An ESOP (Employee Stock Ownership Plan)
For the purposes of this blog post, we are going to focus on the top three successor options - all Insider Transfers - to discuss the considerations needed to be made when choosing successors.
How a Successor Honors Values-Based Goals
For owners set on an insider transition, this path is usually considered due to convenience and trust. A transfer to insiders, especially family transfers, are typically a surefire way for a business to carry on a legacy if that is something that the owner is looking to do.
The appeal of an insider transfer is frequently due to the aspiration to reach any of the following goals at the time of their business exit:
- Keeping the business in the community
- Maintaining existing company culture
- Ensuring the owner’s legacy and/or family tradition remains
- Owner maintaining a desirable amount of control and flexibility while transitioning
- Encourages employees to stay with and grow with the company
- Business continuity may be easier to preserve
An Advisor’s Role in Choosing a Successor
As an advisor, it is your job to explain to your clients how each insider transfer option can help reach their ownership objectives. Further, helping them identify the appropriate choice is crucial in ensuring they are able to set aside sentiment and emotions to make the smart choice and avoid common mistakes.
Three tips for business advisors:
- Refer back to the financial needs analysis and the company’s preliminary valuation that will provide logical and rational facts for an emotionally charged decision.
- Relate each successor choice to your owner’s values-based goals (like the ones listed above) to evaluate if the chosen successor will ultimately help reach those objectives and how.
- Remind business owners that taking the time to make certain you have made the right choice is better than proceeding down the path with the wrong successor and having to eventually change paths or delay an exit.
Questions for Advisors to Ask Business Owners
It is one thing for a business owner to select a successor who they’d like to take over their business. However, a successful business transfer is very dependent on the willingness of the successor to put forth time, money, and energy to the transition plan, and the overall business.
As the advisor to business owners, you must ask questions of your owner clients that will get them to think about the feasibility and reality of the successor they have in mind. Such questions might include:
- Is the successor capable of being an owner?
Owners should be able to explain to you why their chosen successor(s) can run the business without them. Even the best employees do not necessarily make good owners.
- Does the successor desire to be an owner?
A common mistake that owners often make is to assume their chosen successor wants to become an owner. This misstep is often made in situations where owners want to pass down their business to a child or family member. While it might be easy to assume that one day their child or family member will take over for the sake of keeping the business in the family, ultimately successors must possess the same spark that motivated the owner to start the business in the first place.
- Does the successor understand the risk involved in business ownership?
Many times even if a successor is interested and/or capable, it’s important that they also understand the risk involved in business ownership. For example, many employees might be willing to become owners until they learn that most times they will have to put their own personal funds in (depending on the structure of the buy-in) to pay for initial ownership interest and fund ongoing business operations.
Final Takeaway - Tips for Successor Search
When it comes to selecting a successor that is not a strategic outside buyer, there can be more personal attachments and history to consider. In addition to the tips and questions mentioned above, keep in mind some of the following thoughts during these discussions with your clients:
- Keep an open mind. The future of any company relies on new ideas and opportunities, so being headstrong or inflexible will not make for a healthy transition.
- Avoid micromanagement. Regardless of successor selection, it is important to allow for the next leader to find their own way. Giving them responsibility and time and space to learn from before the owner’s exit will increase a successor’s readiness.
- Prepare and be inclusive. The transition should be an open and inviting process for the entire team. Regardless of the assigned successor, having open communication, both internally and externally, allows for the opportunity for feedback and a productive transition period.