Many private company owners spend a lot of time thinking about which transition option is best for them – a family transfer, an ESOP strategy, a third party sale, or perhaps just keeping the business and operating it. The process is daunting; it can take years for an owner to identify and understand all of their available options. And oftentimes, the right choice only manifests itself after a significant investment in time and effort to thoughtfully weigh all the options.
When we advise owners in this quest, we try to focus them on keeping their options open. This optionality – the ability to provide as many viable options as possible while assessing the choices – is critical, but it often gets lost in the shuffle as owners focus on what they may perceive to be the “right” approach.
The one activity that will provide the most optionality is focusing on your company’s readiness. Having a prepared company means that you are focused on maximizing performance and value creation for the owners. This often requires owners to change the way they run the company so that it functions at a much higher level.
There is a common set of activities that companies undertake in preparing for a transfer that generally include professionalizing the company’s management structure and increasing accountability systems for managers. These include:
- Establishing a board of directors or advisors – Establishing a board is a best practice for high-performing private companies. Most are advisory in nature (rather than fiduciary) and involve the owner opening themselves up to outside scrutiny on their strategy and performance.
- Re-focusing your strategy – This goes hand-in-hand with establishing a board. Many companies have annual operating plans, but lack a clear strategy and market position to gain a competitive advantage. Refining your strategy and business model often requires exiting certain markets and getting rid of some customers in order to refocus the company on what is most important.
- Implementing a succession plan – High-performing companies invest in their management teams and identify successors for all of their key leaders. This can be a difficult exercise, because it often involves getting rid of people who are not operating at a high enough level to support the company’s future goals. Our rule of thumb is to evaluate the management staff on a scale of one to 10 and identify a development plan or an exit plan for anyone who scores below an eight. These are hard but necessary choices.
- Increasing reporting and accountability – Increasing reporting and accountability for business results is a high octane activity that many companies lack. This activity also goes along with setting up a board, as it involves asking key managers to present plans to the board and allow themselves to be held accountable.
- Implementing an incentive plan – If the company is going to implement more structure and accountability for its managers, realigning or upgrading incentives is usually part of the plan to let them know what is in it for them if they succeed. Gainsharing programs are a best practice at high performing private companies because they align everyone toward the same goals.
Companies that focus on these five items will increase their performance and value. If you choose a family deal, you will be handing over a much better company to the next generation. If you create an ESOP, you will improve the odds of success for your employee owners. And if you pursue a third party sale, the company will be worth more in the transaction. No matter which choice you ultimately make, having a prepared company beforehand increases your transition options and improves your chances for success.
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