As a small business owner, you’ve likely thought about the time when you’re ready to hand over the reins to someone else and explore other opportunities. Whether you want to retire, start a new venture, or just accept a reduced role in your company, early planning and a sound strategy are the critical elements to a successful management transition.
Plan Your Exit Strategy 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. 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 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. These professionals handle situations like yours frequently and can offer sage advice.
Identify and Prepare Your Successor
Part of a good succession plan includes identifying and preparing a suitable successor. Ideally, your successor has the temperament, values, and leadership skills to build on your work. In many cases, your successor to a small business is a family member or trusted employee.
When you opt to sell the business, your “successor” is an outside buyer, and it’s beneficial to 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 resign during the transition. If you structure the deal with earn-out provisions, you want to do everything you can to protect future revenue streams. If you plan on putting your business assets up for sale to possible buyers, you 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, it’s a good idea to make them aware of the transition well before it takes place. This affords them the honest opportunity to decide about the future and prepare themselves for new management.
If there’s a chance that new management wants to make personnel changes, alerting your team early lets them search for backup options. Similarly, your vendors and customers should know before a transition takes place. It’s unlikely that they need as much time and attention as employees, but 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, a family member. These often include:
- Balancing family and business interests
- Identifying and grooming a successor
- Handling interfamily disputes
- 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). It’s common practise that the acquiring party includes members of the company’s executive team, which helps ease the stress of transition because they’re already familiar with the business.
If you choose the buyout route, you don’t retain any ownership interest in the company, although it’s conceivable that the new owners retain you 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. 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 are instrumental to your transition and makes life easier for all parties. Keeping your books in order is one way to make the transition run more smoothly. The QuickBooks Self-Employed app helps you as a freelancer, contractor, or sole proprietor track and manage your business on the go. Download the app today.