Case Study 4 -Why Business Transitions Take So Long
Why Business Transitions Take So Long
As business transition strategists, we are strong advocates of starting to plan the transition of an enterprise or business—whether family or private—long before owners are ready to move on to the next phase of their lives (a phase we call their “Next Adventure”). From experience, we know that the more time owners give themselves to create and execute a transition plan, the more options they have when something doesn’t go as they expect. Still, owners wonder whether there’s a benefit to planning when they’re still enjoying ownership and why business transitions take so long. That’s the question “Gretchen” asked when her CPA suggested she meet with me along with one of our transition strategists on our team.
As soon as the introductions were complete, Gretchen, the owner of a successful kitchen design and installation company, said, “I don’t mean to be rude, and don’t want to waste your time, but I think the timing of this meeting isn’t right. Maybe we reconvene in five years?”
Dilemmas and Business Transitions
Having worked with owners for over 30 years, Gretchen’s comment didn’t surprise me. When one of an owner’s professional advisors (usually a CPA or attorney) suggests that one of their clients meet with us, owners are always polite and almost as consistently skeptical. Many aren’t thinking about their someday transitions because they are at the peak of their careers. Others who have thought about the day they will leave their companies are often frozen in place by one or more of the following dilemmas:
- They are energized by running their companies and can’t imagine what else could bring them the same satisfaction.
- They don’t have a successor in mind, or if they do, that person needs time to “grow into leadership/ownership.”
- They don’t know if their companies are worth enough to yield the cash they need (or want) to achieve the financial security they want and deserve.
- They aren’t sure that their companies can succeed without the cash flow that will be diverted to buying them out.
- They expect they’ll “get killed in taxes.”
- They worry about how the children and/or employees whom they don’t choose as their successors will react to their choice.
- They want the culture that they’ve created over the years to continue and wonder how that can happen once they are no longer in charge.
- They want their employees to keep their jobs and suspect that a third-party buyer won’t or can’t guarantee that.
- Some children are active in the business and others are not, so how do they treat everyone fairly?
- They aren’t even sure that the child, business partner or key employee that they have in mind as a successor is capable of ownership or even wants it.
This is far from a comprehensive list, but it covers some of the concerns we hear most often. Gretchen wasn’t stuck, she just didn’t think she needed years to plan her transition.
Business Transitions and Six Big Questions
“I appreciate your concerns,” I started. “And we promise not to waste your time, but if you’ll give us five minutes to ask a few questions, we’ll be out of here in no time.”
“Shoot,” Gretchen agreed.
We asked Gretchen the six questions we ask every owner.
- Why do you want to transition your business?
- What do you have to transition?
- Who do you want to succeed you as owner?
- When are you thinking you might want to transition your business?
- How much do you want and/or need from the transfer of your ownership interest?
- How will you transfer your ownership interest?
Gretchen had answers to a few of these questions and wasn’t sure about or had no answers to others. Again, that was not surprising. We assured her that most owners don’t have answers to all six questions until the planning process is underway and encouraged her to start thinking about the first one. We’ll be launching a new program in 2024 to help business owners discover their answers to the “Big Six” questions. If you’d like to get on the waiting list, you can join here. [LINK]
“I know the day will come when I want to leave, but that day isn’t today and won’t be this year or the next,” Gretchen clarified.
We explained, “Even if it’s not, we’d like you to start thinking about what you want the transition to achieve for you, your family, successor and company because it’s much easier to do the hard work of transition when you’ve set objectives that energize you.”
“Hard work?” Gretchen responded. “I thought you were here to sell me on the idea of transition planning!”
“No so much sell,” I said. “More to explain why your CPA asked us to be here today.”
The conversation continued, “We suggest that you start thinking about your answers to those six questions because they point you in the direction you want to go.”
“I can do that,” Gretchen answered, “But you still haven’t answered the question of why I should start planning long before I’m ready to leave. You seem to be saying that planning is both difficult and time-consuming. I’m just not seeing why business transitions take so long!”
“Not all transitions, take years,” I started. “Some of the owners who use the transition planning process that our company developed work through their business transitions in one to two years. Others can take as long as five to seven years or more.”
“Seven years?” Gretchen asked. “What can possibly take so long?”
“There are a couple reasons, and the first is the high standard we set for successful transitions,” I answered.
“And that is . . .?”
“Unless an owner’s relationships with the important people in their lives are healthy, they have moved on to a meaningful next phase of life, and the companies and successors they left behind are thriving,” I explained, “we consider that to be a failed transition.”
“That was not the list I expected,” admitted Gretchen.
“Really? I asked. “Which part surprised you?”
“The part about relationships,” Gretchen said. “I was expecting you to put at the top of the list something about getting the maximum return on the financial and emotional investment I’ve made in my business over years.”
“We’re not discounting that,” we assured her. “A solid return is important, but when transitions damage or burn bridges with the people who are most important to owners, owners have regrets. And if a transition destroys family relationships, painful regrets can last a lifetime, or even generations.”
Gretchen paused for a moment before asking, “So what’s the connection between why business transitions take so long and relationships?”
“We promised not to take too much of your time today, so I’ll mention just two: Unpredictability and people. Transitions involve people, all of whom have, to some degree, a stake in the transition of a business.”
“I can count those people on one hand,” Gretchen countered. “Me, my successor, and maybe some of the employees who have been with me since the beginning.”
“Your CPA mentioned that you are thinking about one of your sons as your successor,” I observed. “Should we add to your list your other children, your spouse, all of the employees of your company, the families that depend on them and even your community?”
“My husband has never had anything to do with the business,” Gretchen started, “so he’s not really part of my decision.”
“Well, if the business goes to one of your children, will your husband have an opinion about treating your other children fairly?” we asked.
Gretchen nodded, “I see your point. But my community is a bit of a stretch,” she objected.
“Hmmm, I think I recall seeing your company’s name at the top of the United Fund’s giving list, and I read about how your company adopted a school for at-risk kids. If your successor doesn’t continue those activities, will your community be affected?” I asked.
Unpredictability in Business Transitions
“Okay, I see. So, what’s the second reason business transitions take so long?” Gretchen asked.
“Unpredictability,” I answered.
“Which means . . .?” she asked.
“Hypothetically,” I suggested, “what if it isn’t your son’s dream to run your company? What if he doesn’t want to spend as much time away from his family as you did? What if it takes longer to bring him up to speed than you expect? What if the economy tanks, a big competitor moves into your territory or a key employee jumps ship and takes some of your biggest clients? What if . . .?”
Gretchen held up her hand and stopped me. “I get it, things can go wrong.”
“Not wrong, exactly,” I observed. “Just not as you expect or plan. And that’s the reason for giving yourself a long runway between the day you start planning and the day you expect to embark on your Next Adventure. When something or someone takes a turn you didn’t expect, that long runway gives you time to adjust and, if necessary, to pivot.”
“The more time I take to plan,” Gretchen started, “the more time I have to figure out a way to do this in a way that doesn’t break up my family or my company, right?”
Why business transitions take so long
“Exactly, we noted. “That’s the answer to your original question: ‘Why do transitions take so long?’”
“As long as you are clear that I am not embarking on ‘my Next Adventure’ anytime soon, I’m willing to talk again,” Gretchen said.
“That’s great,” I answered. “I’ll have my assistant call you, and we’ll find a convenient time to meet.”
Gretchen shares the characteristics of the owners we work with. She’s successful, smart, and appreciates the relationships with the people who are important to her.
If you have questions about a business or enterprise transition in your future, let’s talk. We’d love to share the insights we’ve gained from years of working with owners like Gretchen.
We’ll be launching a new program in 2024 to help you discover your answers to the “Big Six” questions. If you’d like to get on the waiting list, you can join here.
Elizabeth Ledoux is a co-author of the award-winning It’s A Journey: The MUST-HAVE Roadmap to Successful Succession Planning, as well as Accelerate Your Entrepreneurial Flight and Understanding the Growth of the Entrepreneur. She frequently speaks to organizations and business owners about challenges and opportunities in private and family business transitions, business and individual growth, and the business succession journey.