Take Steps to Fill the Void
In the case of a completed transition, there are generally three outcomes for the leader who undertakes a sale or succession process:
- An ongoing advisor role in the business
- An advisor role that diminishes over time
- A clean break
In many cases, leaders can influence the outcome. If sufficient time and effort is invested in preparation, and the leader acts in a mentor capacity to the next generation of owners and/or management, then the next generation of owners (or buyers) will want to continue to leverage that experience. Conversely, there is a real risk that the next generation or a buyer does not see eye to eye with the leader, and that could abruptly end the leader’s involvement. Regardless of outcome, there will be a shift in the leader’s responsibilities.
So, how can those concerned with a loss of livelihood, enjoyment, or identity fill the void? While there will be many options, we recommend leaders consider a few points that we believe are important.
- An exit from the business does not mean that the days of adding value to an organization are over. On the contrary, there are many people who are interested in the experience of a leader who has successfully grown and transitioned a business. There are a multitude of opportunities to remain engaged through board membership or advisory roles.
- Leaders should focus on what they want their post-transition life to look like. Many owners determine that they are interested in building out a board presence or maintaining some other level of professional involvement where they can leverage their business experience and skills to help other companies grow. Or, they may finally decide to spend their free time pursuing nonbusiness-related activities that they never had time for in the past.
- Meaningful “second acts” can be great. We have assisted countless leaders with tackling this very challenge through conversations in which they identified interests, passions, and what is most important in their lives. We also leverage our network and expertise to help leaders find new opportunities: board service, philanthropy, mentoring entrepreneurs, investing, creating family councils, and many others.
Lay Out the Rules of Engagement
Owners who are stepping down from their family business often want to continue to foster and nurture the next generation and remain involved in the business in some way. Doing so requires a different skill set than it did for ownership, and retiring owners must substitute the skills needed for growth with the skills to mentor and support the next generation. Owners must think about how they will offer guidance to the next generation while also allowing them to successfully act as owners.
No matter the level of involvement, it is critical that the previous owner’s new role is clearly defined so they do not overstep any boundaries. They may have one vision of involvement, while the next generation has another, and it is critical that this is outlined and communicated.
This is particularly important for owners of family businesses, who need to think of how they want to offer themselves in support of the next generation of owners while allowing them to rise to the occasion and run the business. And as uncomfortable as the thought may be, retiring family business owners should be prepared to hear about the level of involvement – or noninvolvement – the next generation desires. The adjustment can take some time. Ultimately, it comes down to respecting boundaries while being intentional about empowering the next generation and giving them the space to be successful.
Plan for Liquidity (Depending on Your Strategy)
There is one significant area where succession to family ownership and a sale of the business diverge: generating liquid wealth. Family businesses that seek to remain as such typically appreciate “patient capital” – meaning that they want family members to hold the majority of shares and continue passing them to future generations – though share redemptions and dividends are often present and important.
Owners who are transitioning ownership to the next generation should assess how much money they will need when they are no longer working. In the partial or full sale of a business, on the other hand, owners of substantial private businesses realize large inflows of liquid wealth in exchange for their shares in the business. In many cases, these sums of money can be life-altering. As such, it is critical that owners selling a business prepare for an influx of wealth in addition to planning for a shift in their role in a business.
Consider What Advice You Will Need
During a transition, it is important for owners to think about the areas of their post-transition life in which they will need assistance. It may be helpful for owners to have an objective advisor throughout the process of transition to go to for guidance, whether it’s about collaborating with the next generation on a transition plan, navigating conversations with potential buyers, or developing their post-transition personal and financial goals.
Another consideration is tax strategy, especially possible tax benefits. In some cases, those selling a business already have advisors who can be very beneficial for maximizing tax efficiency pre-sale. For those who do not, interviewing and hiring one can help you manage your liquid wealth or help with any tax implications that may emerge when transferring the business to the next generation.
More sophisticated advisors can also partner with owners on:
Owners can assess all of the areas of need and determine where they are comfortable managing the process themselves vs. relying on others. Underlying this decision should be the core values of the owner, family, and business. Owners should think about what role they would like their wealth to play in their life, including that of their family, and make sure they are making decisions around who to hire and how to manage their liquidity and future in alignment with their vision and values.
Brace Yourself for Change
Today, most information, including estimates of a person’s net worth and the sale price of a private business, are one click away. The specifics around the cash proceeds of a business sale, from what was previously illiquid ownership value, can become public.
We find with many of our clients who have a liquidity event, the requests for capital post-sale come rolling in quickly – whether they be to support a less-fortunate family member, invest in a local business, or donate to a friend’s favorite charity. Sellers may not be able to fully avoid this challenge, but they can certainly prepare themselves and, perhaps more critically, their children, for how to handle these situations when they arise.
Make Your Business Transition a Success
The axioms around failed wealth and business transitions are legion. At the highest level, success involves:
- Proactively beginning the preparation process
- Openly communicating with stakeholders
- Determining where to start
- Filling voids left from a change in one’s livelihood
And remember to have patience – both with a lengthy process to ready oneself and the business for change and with answering the question, “What’s next?”
If you are thinking about embarking on a business transition, reach out to our Center for Family Business. We would be happy to help you.