There was such a great response to last month’s newsletter article that we wanted to take a deeper dive into succession planning over the next couple of months. This month’s topic covers how to identify and develop prospective future successors for your business. Starting this process early can be essential in ensuring a smooth transition of leadership.
As a recap, succession planning is the process of passing ownership/control of the business to another. In most cases, business owner(s) look to transition ownership to family members, employee(s) of the company, or a 3rd party purchaser. The transition of ownership can be sudden, because of a death or disability, or it could take several years to find and train the right person to carry on a company’s legacy. Having a succession plan in place, you can safeguard your partners, employees, and clients from any disruptions that may arise during the transition.
Potential Successors Already in Your Organization
- Assess Current Talent – Is there anyone in the organization who has a strong work ethic, leadership potential, and a skill for the business? Would this person potentially have an interest in taking over the company one day? Is there a family member that would potentially want to take over the business?
- Cultural Fit – Consider candidates who align with the company’s culture, values, and mission. The right successor should enhance the company’s culture as they take on the leadership role.
- Leadership Characteristics – Evaluate candidates’ leadership qualities, and their ability to inspire, motivate, guide others, communicate effectively, and make tough decisions. The business landscape is constantly changing, so seek a successor who demonstrates the ability to adapt to new challenges and continuously learn and grow.
Finding Successors Outside of the Business
- Engage Professional Networks – Tap into professional networks, industry associations, attend conferences, and engage business contacts to let people know you are searching for a successor.
- Use Executive Search Firms – Executive search firms specialize in identifying and recruiting top-tier candidates for leadership positions. They have access to a very large network of professionals that can assist.
- Online Job Boards and Platforms – Using online job search platforms and networking sites, like LinkedIn, can be a way to meet potential candidates. You may have to spend more time screening candidates, but it is another way to generate name flow.
- Business Brokers – Business Brokers can help connect you with other business owners who potentially want to take over the business. This could be direct competitors in the same market, a potential competitor that wants to break into the market, or a business in the industry that is looking to diversify and vertically integrate.
- Your business advisors, like CPA, Attorney, Financial Advisor, or Insurance Specialist, could be another resource to generate prospective successors.
Below are some considerations to make when searching for an outside successor who wants to buy the business.
- Financial Capability – Ensure that the prospective buyer has the financial resources and capability to purchase the business at the agreed-upon terms. This includes evaluating their creditworthiness and funding sources.
- Strategic Fit – You have spent your career building this business, so make sure your legacy continues. Look for buyers whose business goals, values, and strategies align with your company’s mission and vision. A buyer with a clear understanding of your industry and a complementary business model may be better positioned to ensure a successful transition for your customers and employees.
- Expertise and Compatibility – The right successor should have industry experience and expertise to manage the current business and drive growth. They should have the ability to handle the day-to-day operations, manage employees, and maintain customer relationships.
- Evaluate the Sustainability and Growth Plan – Evaluate the successor’s growth plan for developing future business. A buyer who is committed to investing in and expanding the business can ensure its long-term success.
- Transition Plan – Work with a buyer to create a comprehensive transition plan that outlines the steps for transferring ownership, responsibilities, and knowledge. This plan should ensure minimal disruptions to operations. Often, we see the business owner stay on board on a consultant/contractor basis for 1-3 years to provide stability and ensure the transition goes smoothly for not only the employees but the customers. It is important to create a well-defined timeline with the new owner of the business and set expectations for how long you are willing to stay onboard and what the specifics of the role will be for that time.
Additional Notes to Keep in Mind
Develop a Succession Plan with That Successor in Mind – Once you have identified a prospective successor, build a plan around that person or entity that can set them and the business up for success. Consider involving your successor in the planning process to help prepare that person for taking over the business.
Remember, the succession plan does not have to be perfect before starting. Most plans are dynamic and will change over time as business conditions change. Give yourself plenty of time to execute the transition of ownership/leadership. It could be a good idea to start the process 3-5 years in advance of when you would like to exit the business. Get your business advisors like your attorney, CPA, and financial advisor involved in the process early so they can provide additional resources to ensure a smooth transition.
Communicate with Stakeholders – Talk to your employees, customers, suppliers, and other stakeholders about your succession plan. Be transparent and address any concerns they may have. This will help maintain trust and stability during the transition.
Test and Execute the Transition – Consider running mock scenarios or test runs to ensure that the succession plan works effectively and can handle unexpected situations. Once everything is in place and the business is ready, execute the transition. Follow the steps outlined in your plan to transfer ownership and management over to the successor. *Ensure all legal and financial aspects are properly handled.
Maintain a Support Network – Even after the transition, it’s important to stay connected with your successor and offer guidance whenever needed. This will help them navigate any challenges that may arise.
Regardless of the type of successor that is ultimately chosen, it is crucial to start the succession planning process early. This allows for plenty of time to identify and groom potential successors, address any legal or financial considerations, and develop a comprehensive plan that ensures your hard work and legacy will continue to thrive even after you have stepped away from the business.
At Muncaster Financial Group, we specialize in helping business owners create comprehensive and dynamic succession plans that set business owners up for a successful transition into the next phase of their financial lives. Feel free to contact us to schedule a consultation and learn more about how succession planning can benefit you and your business.
Disclaimer: This article may be incomplete and is intended for informational purposes only and should not be taken as legal/tax advice or opinion. Muncaster Financial Group provides tax and legal guidance but is not a legal advisor. Consult with an attorney, CPA, and financial advisor for estate and succession planning needs specific to your situation. Investment Advisory Services are offered through Investment Advisor Representatives of Cambridge Investment Research Advisors, Inc, a Registered Investment Adviser. Securities are offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC, to residents of AL, CO, FL, GA, NC, SC, TN, and VA. Cambridge and Muncaster Financial Group are not affiliated.