You know your business best. You know your competition, your partners, your customers, and your suppliers. You know the people who work in your business and the processes that make it tick. But do you know how your business will manage without you?
When it comes time for you to exit, how are you going to do it? Are there buyers willing to take it and provide a smooth exit? Do you have a group in mind that you would prefer to sell to? Most entrepreneurs don’t achieve a smooth, immediate departure from their company. Instead, they need to plan and work to exit the company. In many cases the level of planning in the succession process can directly affect the business’s realizable value.
Succession can be a challenge precisely because we are so close to our own businesses. It can be very hard to distinguish between what you know is important and what others in the firm believe is important. Generally, if you’ve built a business from the ground up, your knowledge has been gained the hard way – through temporary setbacks, lost deals, or complete failures. Mismanaged budgeting, bidding, or cost controls leave a lasting imprint on the memories of business owners. Business cycle downswings do the same, teaching us what is important when creating a sustainable enterprise.
Our experience investing in private companies undergoing ownership transition has led us to develop some basic rules of thumb for existing owners beginning a transition. If you’re starting to plan your own exit, these principles will help to focus your effort:
Don’t underestimate yourself
Your experience comes from a long history of successes and failures that have also built your connections and reputation in the industry. Over time you may have imparted that experience to your organization by creating business processes or through direct mentorship of key employees, but make no mistake: your experience is very hard to completely transfer to your organization or the people within it.
If you can, exit in stages. Plan to remove yourself from non-core tasks first, then from the general day-to-day operation of the firm, and finally from the strategic direction of the firm and the governance structure. As you step your way out of the business, your experience will be available where your successors need it. As you move away from day-to-day operations, consider changing your role in the firm from operator to coach and mentor.
Even if you can sell your company outright and walk away, beginning this process will create a sustainable high-quality management team – a key component for many potential buyers.
Replace yourself with a team
Filling key management roles to replace yourself is hard. Once you’ve identified the roles that need to be created and filled, focus on building a team that will have greater capacity than you did personally. By replacing yourself with a team of people, you should be able to increase the intellectual and operational capacity of your firm.
Succession is difficult and time consuming for everyone involved. Don’t underestimate the strain it will place on the people you’ve selected to succeed you. At first, the people you bring in will be less effective than you are at the tasks you’re delegating to them. They are also going to be managing you during the transition, which is probably more time consuming than you think. Together, these two factors can completely eliminate any extra time that management may have to seek out new business. Make sure you replace yourself with enough capacity to keep your company moving, changing, and growing. Attracting top talent is always easier in a growing firm – top managers do not like to manage a decline.
Succession, done properly, will leave the company stronger after the founder has left, not weaker.
Take your time
Do not rush the transition. Even if you’re coming to it late, take your time and ensure that you understand your own desires and intentions before you start the transfer. Once you’ve started, take your time in the execution. Finding the right people can take time but realizing they are the wrong people can take years. If you are clear on your own transition goals, it will be easier for you to create a proper description of the roles you’re hiring for and the personality types you need in the firm. This clarity will reduce the chances of a hiring error.
No matter how well you’ve planned, you may lose key employees or need to change the people you’ve selected for the transition. This can set you back significantly, especially if you begin transitioning ownership to the incoming group before you’re sure you have the right people. Take the transition seriously, make the changes you need to and don’t procrastinate – but take your time to vet each decision before moving on to the next one.
Make the plan, but don’t fall in love with it
Unless you’re successful in exiting all at once, chances are that your transition will take a few years. By the time you’re completely removed from the organization the business may have changed entirely. You can’t really plan for what the business will look like in 10 years, so be flexible. Adapt to change, ensure the business has enough capacity to grow, and support the key individuals you’ve identified or brought into the firm. As you transition, help those around you to be the drivers of change, reducing the company’s need for you over time.
Be honest with yourself about whether your plan is working. If it isn’t, diagnose the problem quickly and change the plan. Even if you have to change the roles of key, trusted individuals, you’ll need to move quickly because delays can set you back years – time you don’t have if you’re looking to transition out of the business.
Plan to remove yourself from non-core tasks first, then from the general day-to-day operation of the firm, and finally from the strategic direction of the firm and the governance structure.
If you’re early in the process it may be wise to keep it to yourself – otherwise you could create unrealistic expectations for some employees and that can result in employee turnover. Once you’ve got the people or plan in place, communicate as much of the plan as is relevant. Some people may need to know more than others. The person or people you have selected to succeed you may need full information and may need to be included in the planning process. Others in the firm may not need to know anything for a couple of years.
External communication can be just as or more important than internal communication. Relationships with suppliers, customers, and other important external stakeholders can sour with uncertainty. The worst thing a customer can hear is two different and competing interpretations of what is happening within the firm. Your employees need to understand the corporate message around succession so that none of your key relationships develop any uncertainty.
Transitions are hard to get right; nobody does it perfectly. But if you give yourself time to plan and execute, and pay a lot of attention to the way you communicate and who you communicate with, you’ll give yourself a good chance at success.
First published in the June 2018 edition of The Business Advisor.