At some point, you, like every owner, will think about the day you will transition the leadership of your company to a new owner. Today, transitioning may be a low-priority issue on your long-to-do list, or you may be frozen in place because you don’t know how to begin or worry that a transition could damage relationships with people who are important to you. Many owners put off their transitions for these and other reasons until something prompts them to act. In this article we share eight reasons owners decide to embark on the succession planning journey.
1. Life is short.
The most common reason owners begin to think about embarking on their succession journey is in reaction to the death of someone they know or a health scare of their own. One of the stories in my book comes directly from an owner who did not develop a business succession plan until his cardiologist suggested that he “get his life in order” prior to heart surgery. The death or illness of a colleague, competitor or someone close to an owner can have the same effect.
2. It’s that time.
A goal some owners set either when they start their companies or somewhere along the line is the age at which they will retire or start a new venture. It’s not unusual for owners to set this date with input from their spouses—individuals who have sacrificed along with them “for the good of the business.”
3. The business is that valuable.
Just as some owners set a time limit on ownership, others set a business value goal. Today, younger owners, especially in tech-related industries, often set valuation goals. When they reach their goals, they then decide whether to transition out of their companies or adjust the goalpost.
An intended successor says, “No thanks.”
When the person whom an owner always thought would be a successor decides to take another path, most are shocked. That person might be the owner’s child who is unwilling or doesn’t feel ready to take over the company or an unrelated person who leaves because the current owner is taking no action to transition their business. These would-be successors grow frustrated by the lack of a plan and become tired of waiting for the current owner to create one.
Early in a company’s life, owners guarantee loans with personal assets or secure friends-and-family financing to feed the company’s growth. As a business grows, many owners consistently plow excess cash back into their companies. That level of risk and personal sacrifice year after year can take its toll on owners and their families. When owners experience this type of “capital fatigue,” many are motivated to discuss transitioning their companies to new owners.
Like owners who experience “capital fatigue,” other owners experience “battle fatigue.” Many owners fought through The Great Recession of 2008 and/or the economic upheaval of the pandemic. They know how these events affect the value of their companies and/or their own quality of life. When some owners see smoke on the horizon, they decide to chart a path to their exits before they feel the heat.
A change / decline in the industry
It isn’t only macroeconomic upheavals that move owners to action. A contraction or significant change in an industry can have the same effect. I wonder whether the owner of the ferries that crossed the Golden Gate Strait in the early 20th century took steps to reinvent his business or conducted business as usual until the Golden Gate Bridge was complete. Perhaps his transition plan was to conduct an orderly liquidation of his assets.
The time is right in the M&A Market
In 2021, before interest rates and inflation started to rise, the mergers and acquisitions (M&A) market for mid-market companies (transactions less than $500 million in enterprise value) delivered record deal multiples. In favorable conditions like these, some owners take advantage of good offers from financial or strategic buyers.
When I help owners develop their transition roadmaps, I always include both liquidation and a sale to a third party in the mix of available options. If a sale to an outside third party meets an owner’s most important goals, we assemble a team of experts (e.g., legal, financial, etc.) so that owner can navigate the M&A market successfully.
You may be motivated to begin planning your business transition for a reason not listed here, but the key is to begin long before an event forces your hand. When you give yourself time to design and navigate the path to your transition, you gain the opportunity to prepare yourself for your next adventure and allow your business and team to prepare for new leadership.
If you want to begin your transition journey or wonder whether the time is right for you, let’s talk.
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.