You’ve spent your entire adult life building a business.
As you’ve become more financially independent, you begin to think about retirement and enjoying the fruits of your labor.
That brings up the next issue: Who is going to take over for you?
Ideally, the business continues either for your personal satisfaction or, perhaps, to maximize its value to you and your family.
How do you find your successor?
Most often, successors are family members, employees or third-party buyers, each with pros and cons.
The most important thing is to identify your successors early, allowing time to groom them.
Family dynamics are challenging. Typically, you know family members best, but emotions can get in the way.
The best thing to do is agree up front on expectations and boundaries. While there are risks to working with family members, there also are great rewards.
Generally, no one will care more about your business than someone who has benefited from it over the years.
Worth noting, however, is less than one-third of family businesses survive the transition from first- to second-generation ownership.
Sometimes you have an employee who has taken such an interest in your business that he or she has the drive to not only succeed but take the business to the next level. If you are so lucky, embrace him early on and allow him to grow.
It may make perfect sense to make this person a shareholder or partner long before you plan to exit. It may be a big positive for all involved.
In rare cases, owners have both that special worker and a family member who, in effect, compete to be the successor. Try to sense potential problems before they occur and make sure to proactively communicate to prevent surprises.
Try not to ruin the culture of your organization because of the appearance of a family member stepping in with the perception of not paying his dues.
This appears to be the easiest solution, which may not be true.
Yes, this clean break from your business may be appealing from a financial standpoint.
More difficult is that so many business owners desire to have their customers and clients “taken care of” when they are gone. Proper planning well ahead of time often makes this a moot issue.
Only time will tell when a new regime comes in to run the show. Hopefully, you can try to prepare for this long before it becomes an issue.
Is your goal to perpetuate the business or maximize value?
While you will always want to maximize value, the best successor in the long run might be one who pays you less at the beginning of the deal.
Naturally, you want to be paid the most, and the buyer wants to pay the least. As is typical with emotional financial issues, you need to be realistic about how much value you can garner from the sale.
Again, this may influence who you select as a successor.
HELP YOUR SUCCESSOR
A business’ value is determined by the current value of its future profits. Hence, maximizing these future profits maximizes shareholder value, including that of the seller.
The seller’s best chance of success is always to maximize the buyer’s profitability.
Do everything you can to help this successor make money in the future. You will be rewarded for it.
DECADE IN ADVANCE
Start planning for succession well ahead of time. When you identify a successor a decade ahead, you can make the transition as simple as possible.
What might appear to be giving up a lot at the outset may, in fact, be a small price to pay for long-term financial success and financial independence.
Paul Marrella is a wealth manager at Marrella Financial Group LLC in Wyomissing, public speaker and author of “What Now? The Widow’s Guide to Financial Independence.” He focuses on providing wealth management and retirement income solutions to successful families in southeastern Pennsylvania and can be reached at www.marrella.com or 610-655-9700.