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Transitioning Your Company to a New Leader

Company Leadership Transition | Succession Planning | Business Value

If you own your own business, there will come a time when you will have to start thinking about your succession plan. Who will take charge after you leave? Will they have the skills needed to keep the business afloat? What if there are hard feelings? These are just a few of the questions you will have to consider when the time comes to transition your company over to new leadership. Read on for more FAQ to help you along the way.

As you approach retirement age, it’s important to plan ahead for transitioning leadership of the company you’ve worked so hard to build — and you may have more options than you realize. Read on for answers to some common questions clients ask when it comes time to start thinking about transitioning your company’s leadership.

How far in advance should I begin my succession plan? You’ll want to begin your succession planning as far in advance of your retirement as possible. Three to five years is optimal. Your plan has a better chance of succeeding if it is formalized and put into a written document.

How do I determine if it’s a better choice to transition my company to someone internally or to sell it? A detailed analysis of exit strategy options can be provided by a specialist in your CPA firm. Succession planning involves very complex issues including family dynamics, personal finances, business planning, business valuation and estate taxes; therefore, outside counsel can be beneficial. There are different strategies and tax consequences involved in both options, so a detailed written review can reveal the best choice for both you and the company.

What steps must I take to ensure a smooth transition? First, you must make sure you’re ready to leave the business – financially and emotionally. Ask yourself if you are emotionally ready to let go and whether you are financially secure enough to retire? Second, create your exit strategy. Your exit strategy should be properly communicated to all those involved.

Internal Transitions

How do I decide which family member/employee is best suited to run the business? Look for a strong leader. Somebody with with maturity, decision-making ability, and passion for the business. You may have more than one family member or employee interested in leading your company after you are gone. You will have more success if you simply pick a single leader. Don’t try to spread out the responsibilities.

How do I avoid hard feelings when naming a successor? If you’re in the difficult situation of having to choose between children, take the time to sit everybody down and discuss the decision. Communication and compassion is key. You should have a process for selecting which one will become the leader, and you’ll want to hold one-on-one meetings with each family member before the decision is made to discuss the process. Once you make the selection, explain why and gather support from family members.

I want to leave the business to a family member, but I’m not sure he/she can handle it on his/her own – what options do I have? There are three options to ensure the new leader is prepared for the job. First, transfer power one year before you leave so that you can be there to guide the individual. Another option is to hire a temporary outside manager to oversee the new leader for a term of one to five years. Or, you can create a board of advisors to meet monthly to act as a sounding board for the new leader.

Once I retire, am I out for good? What if I want to check in to see how things are going? Ultimately, once you leave, the new owner has complete control. If it’s a family member, consider family dynamics. Do you have a strong enough relationship that the son or daughter feels comfortable with you checking in? If so, state your expectations ahead of time, so he/she knows your interest in remaining involved.

External Transitions

What steps should I take now to make my business more valuable once I’m ready to sell? If you know you want to sell your business upon retirement, start planning early for ways to make it more attractive to buyers – this includes increasing cash flow or decreasing risk. You can improve cash flow through proper expense management and growth of sales. Diversification of product lines, establishing a solid management team, and reducing dependence on a single, large client are ways to reduce risk for buyers.

Are there ways I can ensure my vision is carried on after I am gone? It is difficult to ensure that it will happen, that’s why it’s so important to carefully consider the selling process. Decide from the beginning what’s most important to you. Is it making the biggest profit you can from the sale? Is it making sure your employees are cared for? Whatever your answer, look for a buyer who has the same values. You don’t have to sell your business to the first interested buyer. Make sure the buyer you choose is the right person for you, for your employees and for your business.

What steps must I take to ensure a smooth transition externally? Stay on for three months to a year after the sale, which is negotiated in the purchase agreement. Some buyers may want you to stay involved when you’re gone, and others won’t, so it’s important to establish those ground rules before finalizing the sale.

Contingency Plans

An important part of your succession plan not to be overlooked is a contingency plan. What happens if you must leave the business for an extended period for issues such as hospitalization? Or, what happens in the instance of a sudden death? While these things are not enjoyable to consider, you must prepare for the day when you can no longer run your business.

For more information on developing a successful succession plan, contact the Rea & Associates’ business valuation team.

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Rea & Associates Inc. | 5775 Perimeter Drive, Suite 200, Dublin, Ohio 43017-3224
phone 614-889-8725 | fax 614-889-0159