Succession Planning: Deciding Who Will Lead Your Business After You
As hard as you’ve worked to build your business, you will want to choose what happens to it if you decide to move on, retire, become ill, or even upon your passing. That takes planning; succession planning to be exact. Unlike resigning or retiring from a job, entrepreneurs must consider what happens to their business when they no longer choose to, or are able to, run it.
Despite the importance of creating a succession plan, most entrepreneurs never do. A survey by Nationwide estimates that three out of five small businesses have no succession plan. Online legal tech company, Rocket Lawyer, puts the figure at 72%. You don’t want that to be you.
While you’ve spent most of your career figuring out the secrets to business growth, there comes a time when you will want to exit or wind down. That could mean selling to a larger company, grooming a family member or current employee to take the helm, or even intentionally shutting the doors.
Every option around succession planning has implications for taxes, retirement income, family dynamics and your ongoing responsibilities. Planning ahead is key to a secure retirement, financial stability and meeting your obligations to customers, employees, investors and your years of hard work.
One of the first, and sometimes largest, hurdles to navigate in succession planning is your own emotions. If the wildly popular HBO show, Succession, proves nothing else, it demonstrates how hard it can be to let go. “While many founders may see themselves as tough business people, they may be very emotionally vulnerable when it comes time to let go of their business,” according to Marshall Goldsmith, Ph.D., a former business school professor, best-selling author and founding partner of the executive coaching firm, the Marshall Goldsmith Group.
You may experience worry about no longer being in control or feeling needed, discomfort around aging, fears about financial security, and pressure regarding family members and others who depend on the business for their livelihoods.
Once you’ve gotten your head and heart around the emotions of succession planning, it’s time to zero in on practicalities. Here are some frequently suggested points to consider.
- Get outside help. Objective third-party advice will likely be needed around tax implications, legal concerns and even business advice about who is best suited to succeed you. “The first mistake that business owners or entrepreneurs make is thinking that they can do this on their own,” according Randy Banchik and Joe Dykstra, Co-CEOs of Westwood Financial writing for Entrepreneur. Depending on the size of your business, you may need to consult with attorneys who have expertise in this area and accountants who can help you structure the plan.
- Cover your financial bases. The savviest entrepreneurs make retirement investments outside of their own businesses to ensure a diversified portfolio, but it’s not uncommon for founders to have all their eggs in their own basket. Especially when that’s the case, you must carefully negotiate your financial arrangements as part of your succession plan. Careful planning can help you avoid unnecessary costs related to handing your business over to someone else and can ensure you obtain all appropriate tax benefits.
- Identify a successor. Common ways to transfer your business to someone else include passing ownership to a family member or heir, selling the business to a key employee, selling to another entrepreneur and selling your shares to your partners or to multiple owners in a larger company. Goldsmith especially cautions founders with grown children to seek external help in assessing the expertise and readiness of offspring to lead the company and to avoid family infighting.
“If a founder dies or leaves the business and a legal dispute follows — everyone will probably lose,” Goldsmith says. “Lawyers will make lots of money, family members will damage relationships, and competitors will rejoice — and may even recruit family factions to join them.” These are the sorts of issues that may lead founders to avoid succession planning — and exactly why it’s needed.
- Consider key stakeholders. In addition to immediate family and your potential successor, you have myriad other stakeholders who will have strong feelings about a change in leadership and ownership. Employees, clients, vendors and shareholders (if applicable) will all have concerns about their connection to the business moving forward. Think ahead about who will be impacted and communicate early, clearly and often to keep them in the loop. Especially for small companies where the founder is directly involved in serving clients, it’s critical to keep them informed and reassure them that their needs will continue to be met under the new arrangement.
- Find something else to do. Finally, Goldsmith advises founders to figure out what they plan to do next before they leave. That could be returning to a role as an employee, pursuing consulting, or retiring to travel, volunteer or spend time with grandkids. Such transitions can be difficult for everyone, but for founders used to calling the shots and creating their own empire (regardless of its size), it can be especially difficult.
“By finding work that will provide happiness and meaning after leaving the business, leaders can be much more effective in planning for transition while leading the business,” Goldsmith cautions. Especially if the business is being sold or passed on to a family member or associate to run, the founder must disengage to let others lead in their own way.
You didn’t build your business in a day, and it’s best not to close it down or transfer it in a rush either. One of the most powerful ways to honor what you’ve achieved is to make plans now for how you may want your business to continue after you step away.