Many entrepreneurs don’t think about succession planning until they are ready to exit their business. However, early planning and communication often allows for a smooth transition of leadership which can enhance company growth during the succession period. A study of the world’s 2,500 largest public companies showed that companies who don’t have a replacement for an exiting CEOs lose out on an average of $1.8 billion in shareholder value. Furthermore, another study showed that companies performed worse when they took a significant amount of time to announce a new CEO. Finally, poor succession planning often means exiting business owners remaining involved longer than is desirable which may directly affect the company’s performance during a transition period.
To create a solid succession plan for their company, business owners must determine who the best option will be to replace them. Outstanding circumstances aside, there are typically three main candidates for succeeding an exiting CEO. Each of these options comes with their own considerations, and today’s article will look at the pros and cons of each potential candidate.
The Three Main options
Option #1: Employee Transition
If transferring a business to an employee or group of employees, a business owner should work with that employee early and often to prepare them to run the business. One example, would be putting the potential employee candidates in charge of new projects to get an understanding of how they handle being in leadership role. Employees often have great institutional knowledge of the business; however, not all employees will thrive in an executive role. They also often don’t have cash, so in this type of sell, the owner often finances the sale.
Option #2: Family Transition
If a business owner decides to transfer their business to a family member, should work with the relative to develop a plan for a smooth transition of ownership, while keeping other family matters as separate as possible. The reason for this separation of business and family matters, is that unrelated familial issues can introduce unnecessary complications, which could negatively impact the company’s value. Additionally, a business owner may consider working with the company’s board or establishing a board to serve as an objective third party, in order to avoid potential family bias.
Option #3: Third Party Transition:
If choosing an outside third party, a business owner can negotiate the transition period, which may be a few months to a few years depending on what makes the most business sense. The length of the transition period should be set up to give the exiting owner enough time to help the new owners learn the ins and outs of daily operations. Another consideration when contemplating a third party as your candidate, is their motives for buying your business, and their prior experience. Since third parties tend to have no prior connection to a business, they may prove less reliable as a potential new owner than the prior two options. Finally, a third party may rely less on the business owner. This means that they may try to implement their own operational strategies over the prior owner’s, which may not be in the business’ interest in all cases.
Why All The Fuss?
Regardless of the route chosen, it’s important for business owners to begin developing a succession plan. Failure to do so can result in an overly lengthy transition period, which can have significant impact on a company’s growth and value. Any owner contemplating selling their business, should absolutely consider bringing on a mergers & acquisitions advisor to help them begin their planning process. An advisor can help them identify the candidate that best fits their vision for the business, and help the owner prepare both the business and candidate for a successful transference of ownership.
- Sheila Seck is the founder and managing partner of Seck & Associates, a law firm specializing in mergers and acquisitions, startups, corporate counsel, technology, intellectual property, securities and private equity.