One of the most challenging issues that many leaders face, especially owner-operators of private businesses, is the eventuality that one day their role as the leader will end. That shift could come as a result of a sale of their business(es), a deliberate transition of leadership to the next generation, illness or death. For leaders who gain meaning from what they do or view it as a core element of their identity, confronting and planning for their inevitable separation from some or all aspects of their current leadership role can be difficult and emotional. However, the cost – both financial and personal – of not facing this challenge, and not devoting meaningful attention to it in advance of a transition, is significant. Investing the time in advance to ensure a successful transition can lead to a renewed sense of purpose and personal joy for the leader as well as a bright future for the business and the next generation of owners and managers.

The good news is that leaders who recognize gaps in their preparation for a transition and decide to then invest deeply in facilitating an orderly and thoughtful transition have better outcomes. This applies regardless of whether it is to the next generation of owners and managers or a sale to a new ownership group. To be clear, this is not easy. One of the hardest challenges to overcome for the leader is gaining comfort with the idea that life will be different at some point.

Accept the Challenge of Transition!

Beginning the process of transitioning away from ownership starts with both an acknowledgement and a commitment. Regardless of whether a leader decides to keep a private business in the family or sell the company, they must come to terms with the fact that there will be a transition, which means that their role will change. For that reason, the fear of coping with rapid change or an acute loss of identity can be conflated with the fear of the unknown. However, when planned for correctly, the change is typically gradual and informed by the leader. In order to create a successful transition, leaders should commit to taking the long journey – to prepare for the future of the business and themselves – early. While that requires patience, it also ensures that the fear of change can be extinguished over time, decreasing the likelihood of trauma from “ripping off a bandage.” To that point, it can be beneficial for the leader in transition to also engage with others who have direct prior experience in undertaking these transitions. While professional outside facilitation of the process is often very helpful, having someone to talk to who also understands the intensity of the emotions can be reassuring.

What Does the Future Look Like?

The next step is for the leader to ask themselves, “What do I want the future to look like?” If the answer is an eventual sale of the business, the leader should start to evaluate and plan for the endgame of the transition and separation. That includes appointing people to leadership roles who will sustain the business, providing stability for new owners and employees both and creating structure surrounding processes, systems and financial reporting. These efforts go a long way toward what a leader can control (which does not include macroeconomic or industry dynamics and trends) in seeking to maximize the value of the business in a sale.¹ In addition to business planning, owners should engage in personal pre-sale planning with an advisor – well before a transaction – to ensure that they have achieved optimal tax efficiency.

Alternatively, if the leader decides to maintain family ownership in the business, they will have to shift their mindset from operator to mentor. Doing so requires them to gain comfort with the satisfaction of watching the next generation rise to the challenge and effectively lead their organization as owners and, in some cases, as management. They must also shift from “calling the plays” to serving in an advisory capacity to help the next generation make those calls. How that shift ultimately plays out, however, is highly dependent on the needs and circumstance of the family and the business.

For leaders who prefer their enterprise to remain family-owned going forward, many start the process with the belief that their greatest personal success was how they “ran the plays.” By the end, their thinking often shifts to how they set up the family and the business for future success.

Which New Roles Does One Need?

In situations where the owner is also vacating a management role, the owner must identify whether their role is fillable and whether the organization is structured to receive a successor. It’s not uncommon for many family businesses to be built around the current leader, who often carries a broad set of individual responsibilities unique to that person. In such situations, when leaders try to find somebody to replicate their capabilities, it’s impossible to identify a single candidate. As a result, the owner should conduct a self-reflection exercise in which they think about – and document – all the tasks they complete day to day. It is often illuminating to see everything on paper. Following the exercise, businesses can determine what responsibilities need to be shifted around or created in order to make the executive’s position fillable. For example, some responsibilities may need to be allocated to other individuals who have special skill sets or offloaded to the board. In other cases, new roles may need to be created and additional experts hired to spread out the responsibilities. What remains is what will be performed by the successor. The next step is to document a job description for the new executive that defines the new role that the business and leader are trying to fill – along with required skills and experiences. This provides an objective set of criteria that the business can point to for all candidates – both family and nonfamily – to illustrate the requirements of the role.

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. One is an ongoing advisor role in the business, another is an advisor role that diminishes over time, and the third is 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 do 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 or navigating conversations with buyers. Another consideration is tax strategy. 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 wealth planning, next generation education, trust services, philanthropy, direct investing and creating a family office. 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 owner’s, family’s and business’s core values. 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 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 having 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 transition, give us a call. We would be happy to help you.