As most business owners will attest to, starting and running a business involves a combination of conviction/passion, perseverance, stress and personal sacrifice. Owners invest a significant amount of themselves and capital into running these businesses, and as a result, most have a substantial portion of their net worth tied up in their business. The vast majority of owners/founders we’ve worked with here at Succession Resource Group have communicated that their business is not just a valuable asset, but their most valuable asset. So, why do so few owners have an answer for their key stakeholders about when they will retire from their business and who will succeed them? Many Financial Advisors make preventable mistakes in succession planning because of common myths giving them a sense that they can deal with this topic tomorrow. Here are the most commonly believed succession planning myths that hold business owners back from effectively tackling this important topic:
Myth #1: Succession planning is about retirement, and I’m not ready to retire.
Succession Mistake: Waiting until retirement to begin the planning process
Succession planning should be more about developing a strategy for the business to continue to operate and grow beyond its current owner(s). The owner’s retirement is an eventual component of any succession plan, but more important is the development of a timeline, identification of the key successors, the role development of those successors, and how to finance the transition. Done right, the owner(s) will be able to extract a fair value on their terms and ensure the business and successors are set up to continue to grow.
Myth #2: It’s easier just to sell the firm.
Succession Mistake: Assuming selling will be faster and/ or better for the company
While there is some truth to this statement because succession planning can be challenging and time-consuming, there are tradeoffs that must be considered. An outright sale to a peer or competitor assumes there is or will be a ready and willing market for you. For some businesses, like financial advisors, dentists, CPAs, or other competitive industries, this may be possible. But, for more niche businesses, this may not always be the case and the owner would be leaving a substantial amount of value to chance. It is also important to consider what is best for the client/customer/patient – an outright sale at your retirement can work in a retail business, but where there are ongoing relationships an internal succession will often produce a better outcome. Whether the owner plans to transition internally, or wait till they are ready to retire and sell to a peer/competitor, the value will be substantially better if the transition event is planned for at least 3-5 years in advance.
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Myth #3: I can deal with it when I am ready to retire.
Succession Mistake: Skipping a business contingency plan
Succession planning is not a singular event. It is a gradual process that when done right, creates a seamless transition from one generation to the next and allows the business to outlast its founder(s). Between finding a successor and the role development to put them in a position to succeed, a succession plan may take years to develop. It is also important to consider your contingency plan – what will happen to the business in the event of your premature demise? Developing the next generation of ownership internally may provide you a simple answer.
Myth #4: The next generation of ownership isn’t ready.
Succession Mistake: Failing to develop and nurture the next generation of ownership to take over
Most business owners weren’t ready to be owners when they first started their business. It is a gradual process of learning and adapting. The key is to identify someone with the core skills you deem necessary for your business/industry, that has a strong work ethic, and a desire to learn – then work to develop them over time. Too many owners tell us their plan is to try to hire their successor when they are ready — we call this the “hail mary” succession plan.
Myth #5: Giving up ownership means giving up control and income.
Succession Mistake: Failing to explore all options and equity sharing arrangements
Succession planning is often viewed as an analog option – either the owner runs the business, or they sell it. While these are options, succession planning can happen much more gradually by shifting equity share over time. This succession plan allows the founder/owner to maintain control until the next generation has proven their competence. With that being said, don’t be afraid to give up control at some point before you completely exit.
Whether you plan to sell your business to a peer or internally, in the next 5 to 10 years – having a succession plan and preparing will ensure you and your key stakeholders (employees, clients, family, etc.) enjoy the process and get the most value out of the experience. Done right, owners will only sell their business once, so invest the time needed to do it right and make every decision with full information. Sell when you want to, not when you need to.
