Choosing a successor to run your business is one of the most challenging decisions that you’ll make as a business owner. It can be especially challenging if the successor you choose isn’t the one everyone expects, which could lead to disagreements, fights, and chaos.
Here are a few things to consider when choosing a successor for your business that could position you to exit your business on your terms.
1. It’s your call
The most important thing to remember when choosing a successor is that it’s your call. You may find that when announcing your successor, some people try to pressure you to choose differently.
As long as your successor gives you the ability to exit your business on your terms—that is, with financial security and in ways that achieve your other goals—then the decision you make is most likely the right one for you.
Asking for expert advice about your decision is entirely appropriate. However, if you make a decision that’s good for you that other people may not agree with, it’s important to remember that that’s okay, too.
2. Make sure you’re choosing correctly
How can you know that you’re making the right decision with your successor? There are a few guideposts to give you confidence that the successor you choose will position you for success. Some of these guideposts include:
- Working with a team of trusted advisors to determine what you must do to achieve financial security
- Requesting advice from your advisor team about what it would take for your successor to succeed in ways that help you exit on your terms
- Making sure that your chosen successor wants to be your successor
- “Battle testing” your chosen successor by giving them more responsibilities to see how well they would run the business
As always, the most important thing to consider is whether your chosen successor can help you achieve financial security. Your advisor team can help you determine what it will take for you to achieve financial security while offering guidance on whether your chosen successor gives you the opportunity to achieve that.
However, an overlooked aspect of choosing a successor is ensuring that your chosen successor wants to be your successor. Sometimes, outstanding workers have no desire or ability to run a business. They’re happy being key employees without the added responsibilities of ownership.
Obviously, determining whether your chosen successor wants to be an owner should be done early in the process. This will allow time to train your chosen person for the job, reassure them that they can indeed do the job, or, if all else fails, find a more appropriate successor.
Once you’ve ensured that your chosen successor wants to succeed you, you can then encourage them to take on more responsibility to make sure that they’re up to the task. “Battle testing” your potential successors early in the process can give them and you more confidence in their abilities. An effective test is taking an extended vacation and allowing your potential successor to run the business in your absence.
3. Be clear about your choice
In many cases, potential successors and employees want clarity about what will happen related to the business in the future. This is especially true if the successor you choose isn’t the most obvious one.
A classic example is a business owner who wants to transfer ownership to someone other than the oldest child.
People commonly assume that if an owner is keeping the business in the family, the oldest child will inevitably run the business. But what if you want to hand the reins to a younger child, while giving the older child a less prominent role in the business?
A strong place to start is to be upfront about the reason for your decision. Perhaps the younger child simply has better skills than the older child. Or maybe the older child is exceptionally good at their current role, but adding ownership responsibilities would take them away from the area where they excel.
Regardless of why, it’s crucial to explain to stakeholders the logic behind your decisions.
This does not mean that you should change your mind if people don’t like your decisions. What it does mean is that open communication can help you anticipate pushback, offer strong explanations for your choice, and assuage concerns. This in turn can help you prepare yourself, your employees, and your company to move more smoothly through the ownership transition process.
4. Start early
Choosing a successor, especially one that people may not have expected, can create big, sometimes surprising consequences for your business. By beginning the process early, you have a better chance to anticipate and address the impact of your decision, whether good or bad.
As an example of a good consequence, you might find that choosing a successor creates a sense of harmony among potential successors that you didn’t choose. Going back to our older versus younger child scenario, you might find that the older child was dreading being asked to be the successor owner because they had no desire to do so, but also didn’t want to disappoint you. By taking this potential outcome off the table, that child may be able to better focus on their talents, potentially creating unexpected efficiencies in your business.
On the other hand, if your choice is upsetting to a key employee or family member who expected to succeed you, making your decision known early gives you time to address their concerns, reassure them of their importance to the business, or, in the worst-case scenario, prepare to replace them.
The earlier you start planning to install a successor, the more time you will have to navigate any unexpected consequences. Avoiding rushing your decision also positions your chosen successor to ramp up for the responsibilities related to ownership
We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.
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The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
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