Fundamental Thinking About Business Succession

Transitioning leadership of a company from its founder to a buyer involves a complex mix of a founder’s personal ambitions, business strategy, effective communications, and legal and financial expertise.

Often, transition processes are shaped by expert lawyers, accountants, and investment bankers brought in after a business has been built. Though hiring accomplished experts is essential, it is insufficient. Business owners also need to think carefully about how the following ten fundamental factors will impact their business succession plans:

In the beginning

Know what you need: Calculate your current and future financial needs, then estimate the revenue and expenses the company must generate to meet those needs for the rest of your life – including after you are no longer involved in the business.

Inventory capacities: Chart the specific application of fundamental business competencies (strategy, finance, marketing, sales, production, distribution) that your business needs to succeed – distinguishing between those capabilities you already have, those you will develop yourself, those you will hire others to take care of, and those you plan to hand off as the business matures.

Anticipate governance issues: If you have active partners or passive investors, hire competent legal counsel to craft operating agreements that explicitly anticipate the possibility of disability, death, or (more likely) dissension.

Build the company

Strengthen the team: Recruit and retain high level employees with skills that will initially allow you to spend more time doing what you do best and ultimately provide the foundation of human capital needed to demonstrate that your company has real enterprise value – that is, that it does not depend on your presence to continue generating profits.

Create standard practices: Drop costs and increase the quality of your product and services by designing and implementing standard practices that will demonstrate to future buyers and executives that your company can continue generating profits without undue reliance on existing employees (who can die or be recruited away) or historic competitive advantages (which can be competed away by innovations competitors).

Diversify revenue sources: Reduce the potential impact of business risks over which you have limited ability to control (e.g., regulations, technology, demographics, competition) by securing revenue streams from as diverse sources as possible.

Plan the transition

Explore what’s next for you personally: Think carefully about why you want to transition leadership of the company to others. What will you do with the newfound time and money, and how do your personal plans affect the timetable, structure, , and other aspects of your transition plan.

Hire accomplished help: Retain people who not only have the necessary technical expertise (e.g., legal, financial, marketing/sales, stakeholder communications) but who have also successfully participated in transactions involving similar size, markets, and goals of your transition plans.

Manage obligations: Evaluate the impact of different succession scenarios on your customers, employees, partners, and family members involved in the business, decide how obligated (functionally, legally, ethically) you are to take of these stakeholders during and after the transition, and design a plan to manage those obligations during the transition process.

Create an auction and be able to walk away: All other factors being equal, the greater the number of financially capable buyers, the higher the price you will receive. To avoid the appearance and reality of a “fire sale,” always have a plan for maintaining the business in the event that buyers do not offer enough.

Like anything in life, the sooner business owners think through and act upon these fundamental business succession concerns, the greater the likelihood of their success – both while running the business and after the deal is done.