An Icehouse survey of business owners found a wide range of motivations behind starting out in business. Making money (seven percent) was just one, and not as important as passion for bringing a product and service to life (25 percent), making a name for the founder (20 percent), or creating a legacy for family (18 percent).
Just as motivations vary for starting a business, so do the reasons for separating from it, which can create complexity when the owner wants to exit.
Leaving a family legacy is an important motivator for many owners early on, but in practice how do you choose which children might or could run the business one day? Even starting a conversation about this can be a daunting prospect.
Many of the business owners who come to The Icehouse for advice fall into one of these scenarios:
- Young, created a high value business, maybe technology-based, and now simply want to cash it in. They may not have thought about what’s next, personally or professionally.
- Older, set out to create a legacy, but don’t really know if their children want to be involved, and are unsure how to approach this in the right way. If their family is not interested in taking on the responsibility of running the business, these owners are then often looking to sell.
- Older, forced to sell through external factors, such as their own poor health or the health of a close family member.
While entrepreneurs are often encouraged to think about their ‘exit plan’ from the outset, the reality is that the daily ‘to-do’ list soon gets in the way. A realistic succession and transition plan can be on a five to 15 year horizon depending on the fitness of the business, industry positioning and other factors. Understanding the level of interest from family, employees or other related parties also takes time, which needs to be allowed for.
Often I’ll be approached for advice by an owner expecting to ‘wrap things up by 31 March’.
Timing is everything and the worst case scenario is being forced to sell into a buyer’s market – something which, with a little foresight, can be avoided.
Sometimes hard truths have to be faced – and the sooner the better. The hardest question to confront is whether a saleable business actually exists. A business can be profitable but unsaleable if the owner is the primary salesperson, holding the client database in their head and with no real back-end systems and processes.
Learn more: Succession and Transition Workshop
I ask clients, given what they know of their business, would they want to buy or be given it? ‘No’ is a common response.
Another reality may be that the strengths that made the founder successful in business are not what’s required to assist them making a smooth transition, meaning an investment in new skills or people, or change in operating structure and approach is necessary.
In saying this, it’s not all doom and gloom! I regularly receive feedback from clients on how positive and energising it can be for the owner, family and employees to create the space to consider this topic. Sometimes change can uncover talent within the business as individuals rise to the occasion. Working to a longer term horizon not only provides the time to create value, it also ensures that the owner maximises value upon exit.
A succession and transition plan protects the owner from making an emotional decision to sell to an opportunistic bidder, after say a tough day in the office, or returning from holiday.
A plan also ensures that alternatives to an outright sale have been considered, with the proper guidance. This might be an alternative financial structure that allows you to retain part of the asset, or a different operational structure that means you can step aside from the day-to-day running but continue working with your largest clients.
Start with the end goals in mind
While succession planning and transition should be part of a business plan, and reviewed regularly, it is actually bigger than that. Succession planning is about answering what the owner wants from life, and where and how the business supports that.
For many owners, a better goal than work-life balance is ‘work-life integration’.
So what does good succession look like? It meets the needs and goals of the business owner and the needs of other stakeholders. Think about succession and transition from three perspectives: yours, the business, and those stakeholders working in the business (including yourself).
Being clear in your mind about those motivations means you are less likely to create anxiety for yourself, staff and family about the future.
Avoid making promises to family or staff regarding future ownership by not ‘thinking out loud’. Instead, develop and test your thinking first, ideally with an independent person.
Succession planning should be seen as exciting and an investment in gaining clarity, rather than something to be dreaded. An effective process should involve all stakeholders and retain the relationships necessary for the business to remain successful – and for the previous and new owners to be happy.
This blog post is written by Evana Lithgow, business succession expert and facilitator of The Icehouse's Succession and Transition workshop. This article was originally published in NZBusiness Magazine.