Succession Planning for Your Company and Your Retirement

/ August 6, 2015

Dock - iStockYou have built a successful company. Now you are starting to think about the potential for retirement.

Retiring is a bit more complicated when you own the company. Your reputation, core values, personality, and relationships have been integral to growing a successful company. Here is a process to begin outlining your succession plan.

Are you financially ready?

How much money do you need to live? As you look at your financial needs in retirement, you should identify how much you need to live at the lifestyle you want. This is best done by creating a budget for your lifestyle in retirement. How much do you need to live on? Keep in mind that many of your entertainment expenses currently paid by the company will now need to come out of your own pocket.

How will you replace yourself?

As an owner, you wear many hats. Often, those areas are muddled together, but it helps to think of them separately as you prepare your succession plan.

Your role in the company includes job duties and wages. Who will take over your duties? Often, founders are the chief salesperson for the company. They may put together important partnerships. They articulate the vision to their team. They envision the future and chart a course for it. Who will take over each area for you?

It often helps for your team to brainstorm everything you do to identify how you can start delegating some of your duties. You can then use this list to think about which duties cannot be delegated to someone on your team. These remaining duties help you identify the type of person you need to hire. Typically, the owner’s responsibilities involve strategic executive skills; someone with these skills is typically paid six digits. Do you have someone in the company who is ready for this role or who can be groomed by you?

Can your company afford to replace you? How will you pay the executive who takes over your role? Until now, you may have been pulling most of your money out of the company as profit distributions for tax purposes. After paying for an executive leader to succeed you, will the company have enough money left over to pay profit distributions?

Who do you want to own your company?

As you consider who to sell your company to, you have many options including your children, employees, a strategic buyer, or others in the marketplace.

Selling the company to your children involves many complex issues. Even families who got along before owning a business together often encounter disharmony as they must now work together, make decisions together, and take risks. Preserving harmony in a family, and using the business to benefit a family, involves a thoughtful planning process that typically includes children, their spouses, and a professional who does family business planning. The process involves identifying goals, core values, and a governance structure for making decisions in the future. The process also involves discussing a framework for employment of family members, how they will be compensated, and how to handle discipline and discharge if needed.

Selling the company to your employees is generally dependent on whether they can secure financing from a bank or another source. An ESOP may be an option for some companies, but it includes significant costs to set it up.

Selling your company to a strategic buyer will typically get you the most money from a sale. You get the most money from a strategic buyer because they are able to get more value from the company then it is currently generating. A strategic buyer is a company who could maximize the use of your customer base for their products and your products for their customer base. If your company is acquired by a strategic buyer, the resulting value produced by the company justifies paying you a substantially higher price than if someone continued to operate your company on its current trajectory. Strategic buyers generally have an easier time getting financing then your children or employees because they have an existing company with strong assets and financials.

How long will your transition be?

The earlier you plan, the more time you have to execute your plan, giving your company the best odds at success after you leave. The timing of transferring money, ownership, and your job duties will completely depend on the circumstances. For example, if you are fully paid a lump sum because the buyers borrowed from a bank, you will immediately transfer your ownership to the buyer. If you are paid overtime, you will not want to give up ownership until you have been fully paid.

Sometimes the company’s new leadership wants you around to ensure a smooth transition. Sometimes they want you gone to signal a fresh new direction and clear new approach to leadership. I often ask owners how they will spend their time after they sell the company. Many owners think they will enjoy retirement, only to find they are bored, antsy, and unfulfilled. As one owner told me, you can only golf so much.

What types of professionals are helpful?

There’s an old saying, an attorney who represents himself has a fool for a client. Likewise, a surgeon does not operate on herself. Business owners are too close to the situation to have an objective perspective. Hiring a professional experienced in business succession is a no-brainer. You need someone who understands the relationship issues among your family and employees. You need someone experienced in walking business owners through a framework to make these decisions and address the legal aspects.

Your options for professionals include family business advisors, business attorneys, or those who do both. As you consider professionals, ask them for examples of similar clients. Ask them to talk you through the process of dealing with the difficult issues you have yet to resolve.

Many attorneys understand the legal issues but not the business issues. Many consultants understand the business issues but not the legal issues. If you must choose, pick someone who understands the business issues, and hire a business attorney to implement it from a legal perspective. Remember to also consult with your tax advisor early in the process, because you will have a variety of options for structuring the transaction, with significantly different tax outcomes.

From my experience, there is one skill that sets professionals apart in a succession planning process. Technical proficiency is essential, but it’s not enough. The best experts are the ones who can navigate the emotional and relational issues, helping all stakeholders find agreement on a plan for the future.