Your business 2.0:
Passing the torch to the next generation

It’s taken you years to build your business – you’ve been at the helm for its successes, helped it recover from setbacks, and created an incredible legacy that you’re proud of. So what’s next?

You may be at a point in your life when you’ve started thinking about scaling back, maybe eventually handing over the reins to a family member or trusted employee(s). But how do you ensure that transition is successful – that it doesn’t just preserve your legacy, but keeps building on the gains you’ve already achieved? How do you put the right people in the right seats for the next generation of leadership?

It is vital that all business owners build a succession plan. Not just a vague assumption that a son or daughter will take over one day, or that you’ll eventually sell to a willing executive team. Regardless of timing, every business owner needs to come up with a solid plan that has everyone prepared and knowing exactly what to expect.

5 steps you can take now to set your company up for success

Step 1: Start having some serious conversations.

Don’t assume you know what your family members or executive team want or expect. And if you haven’t stated it explicitly, don’t assume they know what you want the future of the company to look like. If you’ve got a family business, get a sense of the level of involvement and roles your family members want to play, now and moving forward. The son or daughter you don’t think is interested may be chomping at the bit to implement their ideas as a CEO, while the one you’re assuming will be next in line may actually only be agreeing to make you happy.

Have the conversations, even if they’re tough. Explore other roles for reluctant leaders – maybe your son or daughter would be more interested in leading the company’s philanthropic efforts, for instance. Try to come to a consensus on what’s best for both the business and the family, with the understanding that making everyone 100% happy may not be possible.

If your succession plan involves your executive team, those conversations are just as important. Understand their goals, be open to their ideas, and be transparent about your own plans.

Step 2: Conduct an honest skills assessment for your potential leaders.

Many business owners don’t start planning their exit strategy until very late in the game. But it takes time to put the right person in place and ensure they’re set up to succeed. Start thinking about it well before you’re ready to step back or step down. Don’t let sentimentality cloud your judgment – someone can have the right resume (or family name!) but the wrong disposition to be the face of the company.

To understand who’s a fit and who isn’t, make a list of qualities needed to successfully run your business. Look at both tangible and intangible traits to identify the right person – don’t just rely on your heart to make that choice. Consider bringing in outside help to facilitate the transition and add an unbiased opinion to the conversation. 

Step 3: Make yourself replaceable.

If the success of your business is tied to your presence, do everything you can to change that. Share the responsibility and give people opportunities to grow.  Being irreplaceable might be nice for your ego, but it won’t do anything for your risk profile. In fact, it will make your company less valuable in the eyes of potential buyers and investors, and make the transition much harder for everyone involved.

Step 4: Groom your next CEO.

To get your successor CEO-ready, involve them in strategic decisions. Identify traits (both personality and functional expertise) they need to have, and foster those elements through training and mentorship. It’s up to you to make sure they’re qualified to lead the company.

Step 5: Figure out financing for the transition.

How will you enable your successors to buy into the company? You’ve got a few options:

  1. Bank financing. Your commercial banker can help you build a plan that factors in timing, financial needs, ideal purchase terms – and maintaining the legacy of your business. The only caution here is you probably won’t be able to finance the entire purchase price with the bank and may need to supplement with seller financing. In addition, the bank will likely ask the buyer for a personal guarantee.
  2. Seller financing. This is where you provide a loan to the purchaser so they can buy the company from you over time. This is an option for slowly transitioning ownership to a management team or family, but it puts financial risk on you, while taking away operational control. And if the company doesn’t perform as well as anticipated or hits a prolonged rough patch, you may not get repaid.
  3. Employee Stock Ownership Plan (ESOP). ESOPs are retirement plans in which the company contributes stock for the benefit of employees, and they can slowly increase ownership over time. Benefits include favorable tax treatment, employee ownership and (hopefully) increased productivity. However, they are expensive to set up, and expensive and complex to exit if you would like to do so down the road. Plus, there is increased complexity in IRS compliance, and liability through repurchase obligations can put pressure on cash flow during a slowdown in the business.
  4. Private equity. A private equity (PE) firm can be a good option if you are looking for a way to reward yourself after all your years of hard work and get some ownership into the hands of the next generation of leadership. A PE firm’s sole purpose is to help companies grow, so this is also a good option if you’d like to retain some ownership and get that second bite at the apple. Bringing in a private equity firm can help with a transition in a few ways:
    • They can partner with your management team to help them acquire a significant portion of the business when they otherwise wouldn’t have the funding to do so
    • Private equity firms can help with talent acquisition or to support your team in areas of the business that may not be your core strength
    • Most PE firms have additional capital as well as industry resources and functional expertise to help you and/or your management team grow the business to the next level

You’ve built your business from the ground up. More than anything, you want it to keep succeeding, no matter what your future role in it may be. Setting the next generation of leadership up for success will help you maintain that legacy – and keep it growing well into the coming years.

Thinking about your options? Let’s talk.

Need help meeting the goals of your current ownership team and achieving your own vision at the same time? ORG could be the partner you’re looking for. Get in touch with ORG at 512.320.4086 or inquiries@orgroup.com  to find out how ORG can help you take your company – and your stake in it – to the next level.