Transitioning Your Company to a New Leader

Transitioning Your Company to a New Leader

As you approach retirement age, it’s important to plan ahead for transitioning leadership of the company you’ve worked so hard to build. You may have more options than you realize. Tim McDaniel, a shareholder at Rea & Associates who focuses on business valuation and succession planning services, provides answers to the following questions that will help you ensure your business is cared for when you’re gone and that your employees feel good about the transition.

How far in advance should I begin my succession plan?
You’ll want to begin your succession plan as far in advance of your retirement as possible. Three to five years is optimal. The plan has a better chance of succeeding if it is formalized and put into a written document.

How do I determine if it’s a better choice to transition my company to someone internally or to sell it?
A detailed analysis of exit strategy options can be provided by a specialist in your CPA firm. Succession planning involves very complex issue including family dynamics, personal finances, business planning, business valuation and estate taxes; therefore, outside counsel can be beneficial. There are different strategies and tax consequences involved in both options, so a detailed written review can reveal the best choice for both you and the company.

What steps must I take to ensure a smooth transition?
First, you must make sure you’re ready to leave the business � both financially and emotionally. Are you ready to let go? Are you financially stable enough to retire? Second, create your exit strategy. Your exit strategy should be properly communicated to all those involved.

Internal Transitions

How do I decide which family member/employee is best suited to run the business?
Look for a strong leader with maturity, decision-making ability, and passion for the business. You may have more than one family member or employee interested in leadership. Pick a single leader, and don’t try to equalize responsibilities.

How do I avoid hard feelings when naming a successor?
If you’re in the difficult situation of having to choose between children, the worst thing you can do is to avoid discussing the feelings involved. You should have a process for selecting which one will become the leader, and you’ll want to hold one-on-one meetings with each family member before the decision is made to discuss the process. Once you make the selection, explain why and gather support from family members.

I want to leave the business to a family member, but I’m not sure he/she can handle it on his/her own � what options do I have?
There are three options to ensure the new leader is prepared for the job. First, transfer power one year before you leave so that you can be there to guide the individual. Another option is to hire a temporary outside manager to oversee the new leader for a term of one to five years. Or, you can create a board of advisors to meet monthly to act as a sounding board for the new leader.

What training should the new leader have and how can I help ensure he/she receives it?
The most important thing is to not assume the new leader will naturally pick up the leadership skills needed for the job. Rea offers a training course called NextGen to develop future leaders. The course covers the seven areas of leadership: managing and leading change, marketing (external and internal), succession planning, personal development and leadership styles, human resourcing, project management, strategic planning, business ethics and social responsibility. If you decide to offer training in-house, set up an intentional program with steps clearly defined. Otherwise, it’s too easy to push it to the background in lieu of urgent business matters.

Once I retire, am I out for good? What if I want to check in to see how things are going?
Ultimately, once you leave, the new owner has complete control. If it’s a family member, consider family dynamics. Do you have a strong enough relationship that the son or daughter feels comfortable with you checking in? If so, state your expectations ahead of time, so he/she knows your interest in remaining involved.

External Transitions

What steps should I take now to make my business more valuable once I’m ready to sell?
If you know you want to sell your business upon retirement, start planning early for ways to make it more attractive to buyers � this includes increasing cash flow or decreasing risk. You can improve cash flow through proper expense management and growth of sales. Diversification of product lines, establishing a solid management team, and reducing dependence on a single, large client are ways to reduce risk for buyers.

Are there ways I can ensure my vision is carried on after I am gone?
It is difficult to ensure that it will happen, that’s why it’s so important to carefully consider the selling process. Decide from the beginning what’s most important to you. Is it making the biggest profit you can from the sale? Is it making sure your employees are cared for? Whatever your answer, look for a buyer who has the same values. You don’t have to sell your business to the first interested buyer. Make sure the buyer you choose is the right person for you, for your employees and for your business.

What steps must I take to ensure a smooth transition externally?
Stay on for three months to a year after the sale, which is negotiated in the purchase agreement. Some buyers may want you to stay involved when you’re gone, and others won’t, so it’s important to establish those ground rules before finalizing the sale.

Contingency Plans

An important part of your succession plan not to be overlooked is a contingency plan. What happens if you must leave the business for an extended period for issues such as hospitalization? Or, what happens in the instance of a sudden death? While these things are not enjoyable to consider, you must prepare for the day when you can no longer run your business.

For more advice on developing a successful succession plan, contact your Rea representative. Succession planning is a complex issue. Your CPA knows the ins and outs of your business and can provide counsel as you begin to transition into retirement.