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Prepare To Exit

Exiting a business with financial success takes knowledge and planning.

Change is an inevitable aspect of every life cycle. With business, the final evolution can take a variety of forms. You may be ready to retire and pass the business on to a family member. Perhaps your goal is to sell to outside investors and use the proceeds as a retirement nest egg. Or the business may have declined so much that the best exit is a legal dissolution of your company. These tools and resources will help you manage the big decisions ahead for a successful transition.

Selecting the right successor for your business

Alvin Fritschle

By Alvin Fritschle

Alvin Fritschle is the Chairman of the Board of First Bank, a community bank serving Southeastern Illinois and Southwestern Indiana. He has provided financial advice to numerous entrepreneurs for over 40 years as a certified public accountant and the President of First Bank. Over this time, he has demonstrated a strong commitment to assisting his clients with their strategic decisions.

Many believe that management succession planning is only necessary if the business owner wants to ensure that his or her company continues after retirement. Obviously, management succession planning is important for those who want to pass the business on to their heirs, sell the business to a management group, or if the owner wants to reduce involvement in the day-to-day operations of the business while maintaining ownership. Management succession planning is just as important for the entrepreneur who has a spouse and children who are not involved in the business. Unfortunately, the untimely death of an entrepreneur leaves his or her spouse and children not only having to deal with the entrepreneur’s sudden death but also the responsibilities of managing a company they know little about.

As we stated in previous articles, the succession planning process will take a minimum of five years, if done correctly. This process involves identifying the skills of the owner that the successor will need, identifying the children or managers who are capable of developing these skills and creating a plan to train them on the skills they do not currently possess.

Developing children into effective successors

If passing your business on to your children is your hope, it is important that you begin talking to them about the business at an early age. The manner you discuss your business at home will have a far-reaching impact upon your children’s attitudes toward the business as they reach adulthood.

Parents should provide them a balanced perspective of the rewards and sacrifices of managing their own business. In addition, they can lay the foundation for a successful successor by teaching values such as integrity, empathy, hard work and personal responsibility. In addition to values, parents can also begin teaching them communication skills, organizational and planning skills, team building skills and how to negotiate and compromise.

It can become quite a balancing act to provide children with an opportunity to join the family business as a career choice and not simply to please their parents. You want joining the business to be their dream, not yours. On the other hand, you do not want the children to develop an attitude of entitlement. You want them to know they will have to earn the business through hard work and contributions to the company’s success.

As the entrepreneur’s children reach adulthood, they should be encouraged to obtain three to five years of work experience outside of the family business. This will bring new ideas to the company when they return, possibly develop new skills and allow them to develop confidence in their abilities.

Determine the critical responsibilities and relationship of the entrepreneur

The first step in the succession planning process is to identify the critical responsibilities and skills that the business owner possesses. This is easier said than done because most small businesses do not have a formal written job description for the CEO. In the end, they are responsible for everything and what they do on a daily basis often changes based upon the strengths and weaknesses of their team.

In addition to determining the key responsibilities of the current CEO, a review of the key relationships that the CEO has will also need to be reviewed. The CEO may be the primary contact person for the company’s best customers and suppliers. In the succession planning process, a plan should be in place to maintain these critical relationships without interruption.

When developing the list of the key responsibilities of the owner/CEO, the entrepreneur should list out the responsibilities considered to be the most important part of the job. Once this is done, he or she should ask members of the team to list the items they consider to be the most important responsibilities of the CEO. Then both lists should be compared. Often the CEO is doing things that the members of the team are not aware of and, at the same time, there may be things done on a regular basis that the owner does not consider to be important but his team does.

To validate the list, many CEOs have found it helpful to maintain a log of all of activities for a short period time. A two to four-week period is usually sufficient. This will allow you to ensure that important contacts with customers and suppliers are not overlooked. It will also show where you spend the majority of your time.

Create a list of potential successors

The next step in this process is to create a list of potential successors. If this is a family-owned business and you have children not ready to manage the business, include non-family members on that list. This initial list should be all-inclusive and include people that may not be interested in managing the company.

Once you have created this initial list of potential successors, begin an initial evaluation of their potential as a successor. Consider your experience with them and whether they have shown:

  • A passion for the business
  • Leadership skills
  • Financial management skills
  • Strong relationships with other employees, customers and suppliers.

After reviewing each person’s qualities, you can generally shorten the list to two or three candidates. Once you have narrowed the list, begin observing them on a daily basis. Pay particular attention to their management and leadership skills, their ability to handle difficult situations, and how they interact with their co-workers, clients, and suppliers.

The process for choosing a successor

In most family-run businesses, the selection of a successor is an emotionally draining process for the business owner. He or she has tried to raise their children knowing that there are no favorites and that everyone is loved equally. Now, the entrepreneur is forced to evaluate his or her children’s intelligence and leadership skills, and then select one as being superior to the others. It is no wonder that parents are reluctant to begin this process.

The following is a summary of various approaches others have found to be beneficial when making this difficult decision. All family situations are different and the approach will be different too.

Selection of the successor candidate early

Several family-owned businesses decide to name their heir successor early in the process. This process works well when there is a wide disparity in the ages of the children, and one of the older children has demonstrated a passion for the business and is capable of managing it in the future. The advantage of this approach is that it sends a clear message to all employees, customers and suppliers that you intend for the company to continue as a family-owned business even after your retirement. It creates emotional security because it eliminates uncertainty. It also gives family members who have not been selected the opportunity to pursue other career paths if they do not wish to work under a sibling.

The disadvantage of this approach is that it may eliminate the most qualified successor without giving them a chance to prove themselves. This approach may also cause hard feelings among siblings.

Have the candidates compete

Some family-owned businesses with multiple children who are capable of running the business make the decision to allow the candidates to compete against each other over a period time. The candidates will often be rotated among departments to gain experience and develop a broader understanding of the business. This approach has the advantage of reducing the risk of not selecting the most qualified individual as the successor and also exposes the employees to all of the candidates for successor.

One of the primary disadvantages of this approach is that it becomes an excuse for the entrepreneur to not make a decision on his or her successor. Putting the decision off may maintain a level of family tranquility, however, if you delay too long, resentment among the candidates will inevitably build.

The family executive team

Some family-owned businesses are fortunate to have their children become interested in different parts of the business. As an example, one may show an interest in the financial management of the company, while another excels at sales, and another is strong at product design or manufacturing. When this occurs, some family-owned businesses have found a Family Executive Management Team or Partnership to be an effective approach to succession planning. This approach encourages the siblings to work together as a team and find consensus on actions to be taken.

This approach will not work well if the siblings have difficulty getting along, because it will degenerate into factionalism between them that will inevitably sour the family relationships also.

Hire a professional advisor

Some entrepreneurs find it impossible to select among their children for a successor to their family-owned business. In these cases, they may hire an outside advisor or appoint an advisory board of business associates to assist them in making the succession decision. These voices from outside the family can evaluate the candidates more objectively and removes the family from the decision. Once the selection has been made, these outside advisors can become mentors to the successful candidates.

These independent advisors may find than none of the entrepreneur’s children are capable successors. If they are not capable of managing the business, it is better to let that be known early so that they can consider other career paths, and the entrepreneur can consider alternative exit strategies.

Create a training plan

would be very unusual for the individual you have selected to have all of the necessary knowledge they will need to manage your company. While you probably grew up in the company and have been exposed to all the nuances of it, they have probably spent their entire career in only one functional area of the company.

The development and training program should be created by both the entrepreneur and the potential successor. Both should list the strengths of the potential successor and the opportunities for improvement. Once this is done, the successor’s development plan should include both training to provide them the necessary knowledge, along with opportunities to gain experience.

It is often difficult to give your successor the space they need to lead the team, make mistakes and learn from their mistakes, but it is absolutely essential if the training is to be effective. Entrepreneurs often find it difficult to accept that their successor’s leadership style may be different than theirs and intervene more often than is necessary. However, it is also incumbent on the entrepreneur to mentor the successor to help overcome any weaknesses.

Plan your exit strategy

In preparing the development and training program for your successor, it is very important for you to share your exit strategy with them. This discussion should include what role you plan to take in the business after you retire, what effects this will have on the staff and the successor, and when the probable date is that you plan to step aside.

Setting the date is an important part of the succession planning process. Given that, the successor knows how much time they have to get up to speed. As the date approaches, it is appropriate for the entrepreneur to gradually become less involved in the business’ day-to-day management while the successor increasingly takes over the leadership role.

Effective succession planning gives you the reassurance that your business will be in good hands once you retire. However, it is rarely an easy task. Begin your succession plans as early as possible and seek as much advice as you need in order to make the transition as smooth as possible.

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