Father time does not stop and so every private company we work with faces the dilemma of how to address the transition of the company. For the entrepreneur who has built a company, transitioning the ownership and leadership to someone else is often more difficult than building it in the first place. The reason is that the unique skills required to build a company are vastly different than those required to transition it to someone else. So for the founder, it is very counter-intuitive to do the latter.
As you might expect, through our experience working with private companies we have seen companies succeeding at the transition process and many that are failing. However, the biggest group of companies lies somewhere in the middle, because only time will tell whether they fall in the camp of those that have done it right or those that have not. For many, time has not yet forced them to make active planning decisions. As time ticks on without any actions on their part, they begin to slide to the camp of the companies that struggle.
As human nature dictates, many believe time is on their side and nothing is forcing them to plan or take any actions at present. We believe this is a mistake. The process of transitioning a business is easily the most complex issue facing any private company owner. Time can be your friend in this regard, but you must use it wisely and begin to plan for the transition so you don’t wake up one day unprepared.
Statistics show that private company transitions often result in owner dissatisfaction. This is largely attributed to not planning ahead and being forced into a transaction during a time of stress, or selling to a third party without a very clear understanding of one’s goals and all the options available.
In order to put time on your side, we believe it is very constructive to begin planning, research, and discussions five to ten years ahead of your projected transition date. We are not suggesting it is necessary to make a decision that far in advance, but we do believe it is wise to begin the process of understanding your options and getting clarity about your motives and objectives so that you are prepared when the time is right.
In general terms, we categorize this planning at three levels:
- Business Readiness – Having the business running optimally provides one critical thing in this context – options! If any owner is not clear about the transition path, the one thing that will give them the greatest number of choices is to have the business performing at a high level. The areas we most often see as needing improvement are making sure that the management team is of high quality and that the governance structure of the business is such that it could operate without the owner. A business that is highly dependent on its owner limits your options and is worth less.
- Owner Financial Readiness – One of the biggest holdbacks we see in this process is an owner who is not clear about their personal financial picture in retirement. This is not something many owners spend a lot of time on because they don’t enjoy thinking about it. The resulting lack of clarity becomes a big road block in any transition because there is a fear of running out of money. This fear is made worse by not having any clarity on what the business is worth. Getting advice about the value of the business and what drives that value is important because the business is usually the owner’s largest asset. Additionally, a good financial planner or advisor can play an important role in helping an owner understand their financial needs in retirement. The fears can then be diminished through better understanding of these two things.
- Owner Mental Readiness – This is another area that prevents transition plans from moving forward. It has to do with the owner not getting clear on how they want to spend their time after they are finished being the CEO. As a basis to understand this issue and advise owners, we have interviewed many former owners who have gone down this path. What we have learned is that there is no playbook. But ignoring the issue does not help. The key is to begin thinking about your preferences and plan your exit on terms that appeal to you. A good suggestion is to find other owners who have already been through the process and ask them how they processed this difficult but important element of their future.
This is really hard work, but you can improve the odds if you put time on your side. Tick. Tick. Tick.
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