MAR 6, 2017
For business owners reaching or having recently reached retirement age, you are in the throws of the largest transfer of wealth in history thanks to your business success and the sheer size of your Baby Boomer generation. For up-and-coming business leaders, you are in the zone of opportunity to head these businesses in the near future. ...But, succession challenges loom with the prevalent belief that there are not many mitigation options to ensure a successful transition.
One challenging aspect of business succession includes the shear amount of data and 'local knowledge' involved in a business transfer. Michael Lopez, a Partner at EisnerAmper tasked with driving financial operational efficiencies through automation, states, "Today in business, our data driven environment is causing a revolution as it relates to the record keeping function - and this phenomenon can have a direct correlation to wealth and business transfer. Those companies that can establish a proven ability to generate meaningful information regarding their operations in real time and connect that information as it relates to future operations will have a distinct advantage. The ability to maximize the value of their companies while simultaneously easing the challenge of business succession is sought by many business owners."
What are the business owner's succession options?
Another challenging aspect of business succession includes a very important decision - 'who' takes on the company leadership role to ensure its longevity and success? In 2014 I published an article stating, "...business owners have a unique and somewhat challenging responsibility with succession planning. Many business owners feel forced into weighing the decision of whether to sell their business or transfer leadership to a designated family member successor. This decision is typically not an easy one due to concerns of dedication, focus and experience. Additionally, in scenarios where succession planning may include outside candidates, there are typically concerns regarding the level of business relationships and ‘connections’ that will be required to benefit the business – after all, the business owner has built these relationships over their lifetime where they have been laser focused within their industry. I have been asked by business owners many times which scenario makes more sense when applied to a family member succession decision: 1) sell the business and share the proceeds with their family members or 2) turn over the business to a family member to run as a long-term annuity. Many business owners secretly lean towards the former as they don't believe their potential successor has what it takes to keep the business afloat. This decision is even more nerve-racking based on the large amount of data available confirming that 70% of second generation businesses fail and that number increases to an incredible 85% failure rate by the third generation. These are not great odds and can do a disservice to a business owner’s legacy; the importance they place on their legacy is something they may or may not admit to, but major concern for this is present in most cases."
...I believe, however, that there is a third option for business owners to get what they want (retirement) with the confidence that their business will continue with a storied legacy when turned over to a family member successor or outside entity. This third option sits nestled between the decision of selling the business outright vs. fully transferring the business to a family member or outside entity. This 'middle lane' of thought suggests the forming a Board (or fortifying of an existing Board) in advance of succession to assist with the entire lifecycle of the transition as well as a longer term strategic support mission:
- Pre-Transition: The Board, along with the CEO, involved in detailed strategy, planning and preparation prior to the transfer of business leadership and ownership
- Mid-Transition: Support, guidance and assistance during the transition per the strategy and outcome of the plan
- Post-Transition: History and consistent advice/guidance for ongoing operations, challenges and future strategies
A unique possibility for transitioning business owners
For a business owner, this offers up a unique and sometimes overlooked opportunity - pass the title and responsibility of CEO or President to their successor and assume the role of a Board member, potentially the Chairman, for a few years. I typically recommend that all Board members commit to 200 hours of dedicated time per year on their board - this seems more than reasonable to most retiring business owners (who typically were working 60-80 hours per week) and also solidifies specific strategic responsibilities that are incredibly valuable to the company they started or have run for years. Likewise, successors experience elevated comfort levels in their new roles knowing that the transition wasn't a 'one and done' event. For either a new leader or newly appointed position, having direct access to an involved member of the Board who happens to be the business founder or previous leader is an incredible asset sure to elevate the chances of long-term business success.
What will you consider when building or evaluating your Board?
About the Author: In addition to sitting on numerous boards, Mark A. Pfister is a certified board director and advises public, private and non-profit boards in efficient and effective operations. He is the inventor of the 'Board as a Service' (BaaS) engagement model and an expert project/program manager frequently consulting on strategic global initiatives in their initiation and operational phases................ Read full bio here...
CompelCEOs - Speaking Lecture & Workshop - Friday, March 17th 2017
Join Mark A. Pfister on Friday, March 17th for his speaking engagement "Building an Effective Board For Your Company" with Compel CEOs, a high-level mastermind think tank for business owners and CEOs. Friday is an open-to-the-public session capping a week-long speaking engagement................... Register here