Succession Planning: The Earlier the Better

Many entrepreneurs think succession planning is not needed until the owner is ready to retire or resign; however, it is never too early to begin succession planning. Planning early and communicating it often can allow for a smooth transition of leadership and possibly enhance, rather than detract from company growth.

A study of the world’s 2,500 largest public companies shows that companies racing to replace exiting CEOs forgo an average of $1.8 billion in shareholder value. Further, another study shows the longer it takes for a company to name a CEO, the worse the company performs relative to its peers. Finally, poor succession planning can mean disengaged business owners often sticking around in the business longer than is desired which may directly affect the company’s performance.

To identify a succession plan for the company, business owners must consider a preferred transition for the company. While it is hard to predict the future, entrepreneurs should consider what an ideal transition would be. Would it be transitioning the business to an employee, family member or a third party? Each of these potential buyers are different and planning would take a different approach and each transaction can be structured in a way to meet the seller’s goals.

Employee Transition. If transitioning a business to an employee, a business owner should work with that employee early and often. Business owners can work with an employee by putting such employee in charge of new projects and getting an understanding for how that employee may operate after a transition. Owners should work with employees on strategy and financial analysis. Employees often have great institutional knowledge of the business; however, not all employees have what it takes to be a business owner.

Family Transition. If transitioning to a family member, a business owner should work with the relative to develop a plan for a smooth transition outside of discussing family matters. Family matters should be kept separate from the transition. Additionally, a business owner may consider working with the company’s board or establishing a board to help support the family transition and serve as an objective third party.

Third-Party Transition. If transitioning to a third party, a business owner has a lot of flexibility in defining the deal structure. The owner can negotiate the transition period, which may be a few months to a few years depending on the business owner’s wishes.

Regardless of the type of transition, business owners should develop a succession plan so when an owner is ready to exit, the owner can do so without major disruption to the company.