© NAWBO | 800.55.NAWBO
The Graceful Exit
How to Prepare Your Business—And Your Legacy—for the Next Generation
Tough times can and do make people short-sighted. It’s no surprise that in today’s harsh economic climate, naming an heir to the company throne may be the least of a business owner’s concerns. But as John F. Kennedy used to say, it is not enough to recognize the dangers brought about by a crisis—one should also be aware of the opportunities.
Currently, about 40 percent of all privately-held firms in the U.S. are either owned or majority-owned by women, representing 13 million jobs and nearly $2 trillion in annual revenues. And yet, according to surveys conducted by the Center for Women’s Business Research, a large proportion of female entrepreneurs had no clear exit strategy, didn’t have a sales plan in writing and have not yet conducted a formal valuation of their businesses. When markets changed, the women interviewed who didn’t have a succession plan couldn’t act quickly enough and were consequently left with no option but to shut their doors. “If you don’t put an action plan in place, it’s not going to happen,” noted the Center’s Executive Director, Sharon Hadary, in an interview with the Chicago Tribune. “It turns out [many women business owners] don’t have a written plan. We have a concept. We have a goal. But we don’t have the specifics.”
So what should you do to concretize your transition goals and minimize the risks of getting caught unprepared when something unexpected happens? Read on.
The Five W’s of Succession Planning
Q. WHAT is it, exactly?A. Succesion planning is the process of identifying and preparing—by means of mentoring, training and job rotation—who will best replace the leaders of an organization in the event of their retirement, incapacity or untimely demise. For the latter case, it is common practice for companies to insure key employees, such as the Chief Executive Officer, so that funds will be available to help the business cope before a suitable replacement is found and put in place.
Q. WHY should you do it?
A. The best time to cross a bridge is before it collapses. By preparing for every contingency, you: a) minimize the risk of mistakes, confusion and failure during transition; b) give yourself ample time to evaluate potential successors on their commitment, business skills and leadership abilities; and c) groom your chosen heir.
Moreover, succession planning helps you to evaluate your business and its needs, and can be a great incentive for employee development. Lastly, as no company is ever immune from the threats of larger business roll-ups and increasing local and global competition, grooming new leaders may be just what your business needs to gain a fresh perspective and a boost up in a constantly evolving marketplace.
Q. WHO should you choose?
A. Like millions of American business owners, your first instinct would probably be to choose a successor within your own kin. In fact, the latest study by the Center for Women's Business Research shows that female entrepreneurs are nearly twice as likely as their male counterparts to intend to pass their business(es) on to their daughter(s).
There are many advantages to this idea—family members are typically more loyal, more understanding, more trustworthy and more willing to sacrifice for the business than employees who aren’t blood-related. Plus, turning your business into a family legacy can be very appealing. But there are also some caveats: 1) In family-owned businesses, the needs of individuals often take center stage, which can hinder growth—such as when family members are unwilling to reinvest profits into the necessary resources and upgrades, or may choose to spend company funding for their personal use; 2) Emotional ties or conflicts between close relatives working together can interfere with business decisions; and 3) Just because someone is part of the family doesn’t mean he or she would be a good fit for the business, or that he or she would want to get involved in the first place.
Whoever you choose, that person has to be capable and committed to the task at hand. To that end, it isn’t enough to mentor and train your children on the ins and outs of your business. You should also encourage them to first work somewhere else, to help them gain the right perspective and experience, and to help them determine whether or not their interest really lies in continuing what you have started.
Q. WHO else should be in on it?
A. It is advisable to consult with a team of experts, including your attorney and accountant. They can help you determine how much your business is really worth, what the most cost-effective method would be in transferring ownership, and how best to deal with legal and tax implications.
For instance, did you know that if you’re a sole proprietor, bequeathing your business to your family can cost them as much as 60 percent of your assets in federal estate and gift taxes? Or, if you're a co-owner, you would need to decide whether you would like to have your share of the business automatically transferred to your beneficiary upon your death, or if your partner should automatically be given the right to buy out your share. Or, if you have incorporated, you will have less liabilities and less taxes to deal with, but more paperwork to sort out, not to mention the added responsibility of answering to shareholders. Whatever your scenario, you really should consult with a team of professionals when drafting your plan so that you—and your family—would be best prepared and protected for the future.
And remember: Put all your decisions in writing. Legal loopholes exist because there are parts of the written law that are open to many interpretations. To ensure proper checks and balances and to minimize confusion or catfights (such as between family members who have their eye on the business, or between family and non-family employees), draft your succession plan to the last detail, with specific roles spelled out. Enumerate the skills and qualifications your successor must possess in order to keep your business profitable and growing. List protocols and procedures for every contingency, including retirement, disability or death. In case of significant changes in your personal life, such as a divorce or a change in your health or will, be sure to review your plan with your team and immediately revise it as necessary.
Q. WHEN should you start?
A. The sooner, the better. Consider Microsoft: Although Founder and Chairman Bill Gates had always been synonymous with the success and image of his company, he nevertheless successfully transitioned control by slowly divvying up his responsibilities in a multi-year plan. By naming Steve Ballmer as CEO in 2000, then transitioning Ray Ozzie’s to chief software architect in 2004 before officially stepping down in June of this year, he showed the corporate world that it IS possible to execute a leadership transition based on opportunity, not necessity.
Take your cue from Bill Gates and put together a multi-year succession plan, then start mentoring, training and evaluating the performance of your heir apparent(s) before handing over the reins for good. This way, you’ll not only give your successor(s) plenty of time to learn from your expertise, but you’ll also give your customers and employees ample time to get used to the change in leadership.