No one knows what tomorrow looks like, but business owners need to start imagining.
As business owners consider business succession, one of the biggest considerations beyond the financial picture is how they envision their personal future.
“If you like to travel or play golf, what will you do when you get bored of all of that?” asks Dale Gillmore, CEO of Quest. “The first decision most business owners need to make is how will you replace your time with other activities if you are not doing what you are doing today?” You need to have a future developed in your mind so you can be emotionally ready to see what’s beyond the business.”
It’s a hard place for many business owners to go. After years of meeting commitments to employees, customers, suppliers and partners, those promises will now need to be kept by someone else.
Over the next decade, it’s expected that nearly 17 million US businesses will transition as Baby Boomers retire and move their businesses to new ownership. Gillmore helps closely held family businesses prepare for such transitions while helping owners increase business value, understand the business’s worth, and make the transition to new ownership. Managing the expectations and upcoming responsibilities of those stakeholders can help the business owners achieve their long-term dreams for the business and themselves.
Here’s how Gillmore recommends owners address each group of stakeholders as they plan for their next chapter in life.
Employees
Employees are the engine and the culture of any business, and they are the first source of leadership and management of the business in the future. Those employees might be potential future owners of the business.
The first step is understanding the roles business owners are currently performing, including strategy, growth, sales, marketing, operations, legal, accounting, human resources, and IT, so it’s best to know the skills and roles that will need to be replaced. Gillmore says.
“The tricky part of business succession always is understanding if it makes sense for employees to come into ownership, “Gillmore says. “If we focus first on retention, we might first consider minority buy-ins, phantom stock, deferred compensation, or options as versions of commitment both to leadership and management and commitment from leadership and management.” Once retention is secure – “will they be willing to put capital at risk? Do they have access to capital?
Customers/Ventors
As you consider business succession, Gillmore says, you need to understand what relationships the owners have with customers and vendors and how those relationships can be transitioned as well as the risks that might be inherent in the business as a result of those relationships.
“If the business has 60% of its sales coming from one customer or 60% of key components coming from one vendor, the relationship transfer becomes much more critical if the current business owner controls these relationships, “Gillmore says.
Family
The business owner’s estate plan is critical to undertaking any future division of roles, responsibilities, and ownership changes among the family.
“The first view to consider is if family members actually want to work in the business and are capable of performing important roles within the company as leaders or future leaders of the company, “Gillmore says.
The second thing to consider is what value realization is necessary for the business owner to achieve these goals. A business owner may need to realize the value of the business before shifting control to family members.
Partners
It is important to understand what agreements exist within the rights to transfer ownership between business partners, who are unlikely to be approaching retirement age at exactly the same time, Gillmore says. Retiring partners may expect to be bought out, and the buy-sell agreement might suffice to direct the exit of a particular partner. There could be a realization that the business might be more valuable in an outright sale.
“The more partners there are, the more the need for alignment and structure for decision-making to maintain the value and to protect the business,” Gillmore says.
