Every business owner eventually transitions out of a management role. Whether you want to retire, start a new venture, or just accept a reduced role, early planning and a sound strategy are the critical elements to a successful transition.
Begin the Exit Planning Early
No matter the circumstances surrounding the transition of your company, it’s a good idea to make exit planning a formal process. Start planning years before you expect to leave your business. Management transitions can get complex quickly. Even if you feel confident handling the process on your own, consider adding a few extra voices in the form of a transition team. Practically speaking, the transition team can dramatically cut down on the number of hours you’ll spend marketing, negotiating, contracting, and otherwise preparing for your exit. At the very least, consult an accountant, financial planner, attorney, and – if the transition involves a formal sale – a business broker.
Identify and Prepare Your Successor
Part of a good succession plan is identifying and preparing a suitable successor. Ideally, your successor has the temperament, values, and leadership skills to build on your work. In many cases, the successor to a small business is a family member or trusted employee. If your “successor” is just an outside buyer, you should still prepare the buyer for the transition. Careful planning here can help prevent hiccups during the ownership transition and may help you protect key employees who might otherwise be jettisoned in a takeover. If you structure the deal with any earn-out provisions, you’ll want to do everything you can to protect future revenue streams. Note: If you plan on putting your business assets up for sale to possible buyers, you’ll need to know how to scrutinize a term sheet (sometimes called a Letter of Intent).
Prepare Your Team, Vendors, and Customers
If you have employees or partners, they need to be aware of the transition well before it takes place. This affords them the honest opportunity to decide about their future and prepare themselves for new management. If there is a chance that new management wants to make personnel changes, alerting your team early lets them search for back-up options. Similarly, your vendors and customers should know before a transition takes place. It’s unlikely that they’ll need as much time and attention as employees. It’s considered good form and best practice to be transparent and empathetic in your communication.
Family Business vs. Buyout vs. Equity Partnership
If you run – or hope to run – a multi-generational family business, then you probably have a host of additional considerations before transitioning to the next CEO. These include:
- balancing family and business interests,
- identifying and grooming a successor,
- handling interfamily disputes, and
- the problems wrapped up in inheritance planning.
It’s best to consult a family business expert if this is your company’s first transfer. For non-family businesses, ownership transitions often take the form of management buyouts (and their debt-financed counterpart, the leveraged management buyout). In many cases, the acquiring party includes members of the company’s executive team, which helps ease the stress of transition because they are already familiar with the business. If you choose the buyout rout, you won’t retain any ownership interest in the company (although it’s conceivable that you’ll be retained as a consultant). If you don’t like the sound of that, you can always structure a transition that lets you retain an equity share (as a minority stakeholder). Of course, the right plan for you depends on your wants and your company’s needs. Succession and exit planning are serious endeavors that often require serious work. No matter which path you choose, early planning and careful communication will be instrumental to your transition.