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How Transition Planning Can Be a GPS for Your Business

 

How Transition Planning Can Be a GPS for Your Business

Whether it’s on our phones or in our car’s dashboard, most of us love to use the handy GPS to know how to get from point A to point B in the shortest amount of time without getting lost in unfamiliar territory. Some of us even have a GPS equipped with alternate routes should we hit an unavoidable traffic jam.

However, our use of common-sense directions does not typically translate to making one of the most important business planning decisions: the transition. Experienced drivers know that when approaching an intersection, they better have made up their mind which way to direct their car. But when it comes to transition planning, an entrepreneur is oftentimes sitting in the middle of the intersection looking frustrated because he or she does not know whether to go left, right, straight — or just sit there. 

Most successful entrepreneurs have built their lives and businesses upon well thought-out processes to avoid not knowing where they’re going. Yet why do only about 20% of entrepreneurs have a written succession plan? Maybe, while inevitable, it’s a trip they don’t want to take!

It’s no wonder that many specialists believe perpetuating a business beyond the first generation is successful only three out of 10 times.

Succession Planning Isn’t Synonymous with Exiting

As business owners consider the future, many quickly conclude the status quo is not an option to capture future growth or put them in control of how and when they will eventually transfer a business that took part of a lifetime to build. Therefore, succession planning should no longer be synonymous with “exit” but rather with crystallizing a future vision for the business you dedicated your life to.

It’s a long, deliberate process to decide when to transition; how you want the business to be managed to protect its employees, its customers and its value; who you ultimately want to leave or sell the business to; and how to fund the transfer or sale. This process is a game of inches — with an advantage here, another advantage there — that ultimately helps ensure you receive the maximum fair value for your ownership without hindering the business’s ability to grow and realize its strategic potential. The transition planning decisions you make now, or elect not to make, will be a major factor in deciding the future of your business. Like you, many of your peers are wrestling with answering the same three questions:

“Have I properly planned for the management or perpetuation of my business in the event of an unforeseen occurrence, such as death or permanent disability?”

"How and when will I perpetuate the business into the future while realizing value for what I have built?”

“How do I continue to effectively grow and scale my business to ensure a more viable, stable and profitable future?”

Transition plans must be tailored to each individual situation. Since each entrepreneur created his or her business to be unique, transition plans can’t be created by attending seminars or reading white papers that discuss the most common or average approaches.

So Why Are Business Owners Reluctant to Act?

We start with the obvious: privately owned businesses are intensely personal enterprises. Many business owners maintain very close control and oversight over all aspects of the business. They tend to make all key decisions, resist delegating responsibility, be very involved in operational aspects of the business and stay very private with respect to financial results and other business aspects. This style of leadership adds to the anxiety concerning what will happen when the business owner is no longer around to lead. It also causes tremendous uncertainty and confusion about operations and decision making when a successor eventually takes the reins.

Because of the nature of these businesses, owners often make a series of mistakes that hinder their effective transition. Often, people find it difficult to discuss issues related to illness, retirement or death. Lack of time is another commonly cited factor. However, the reality is that a business owner’s day-to-day activities are seldom more important than planning for the future success of the business.

While ownership interests are typically limited to one to three owners, a business has many stakeholders, including the owners’ family members, the employees, the vendors and the customers. While you created the business, every stakeholder I just mentioned has had an impact on making the organization what it is today. Embedding succession into the business strategy will give the key stakeholders a sense that planning for the future is under way, which is a relief for everyone. This is far better than the speculation and uncertainty that arise when stakeholders are kept in the dark about what lies ahead.

Don’t Make Succession Planning a One-Time Event

While there is no way to ensure a business will successfully transition to a new owner or leader, the fact remains you should make efforts as part of an ongoing process, not as a one-time succession-planning event. The importance of early planning cannot be overstated. It helps owners meet their stated objectives and facilitates the continuity of their businesses — for the benefit of all the stakeholders. Succession plans with longer time horizons not only are exit plans but also drivers of future growth.

You may have no interest, need or desire to transition your business today — but all owners should contemplate the eventual transition of their businesses and be in the best possible position at that time for transfer, whether to family members, other shareholders, key employees or a third party. Thinking about and actively weighing the pros and cons on a continual basis will not only substantially increase the likelihood of a successful transfer, but also keep you in the mindset of running the most efficient business possible. If time is not spent understanding the decisions that need to be addressed before coming to critical points, then you will be that car sitting in the middle of the intersection.

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Paul T. Lally
Partner
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