By Paul Lally
To travel from point A to point B in the shortest amount of time many of us turn to GPS systems. These tools are a difference maker for not getting lost in unfamiliar territory. Some of us even have GPS systems that offer alternate routes in real time should we hit an unexpected traffic delay. But these systems are not a replacement for common sense. Approaching an intersection, for instance, we better have made up our mind on which way to direct our car. When it comes to business transition planning, however, entrepreneurs too often are the person sitting in the middle of the intersection looking frustrated because he or she does not know whether to go left, right, straight, or pull off to the side of the road.
Most successful entrepreneurs have built their lives and businesses upon well thought-out processes to avoid making mistakes. Then why do only 20% of entrepreneurs have a written succession plan? Perhaps it is a trip, while inevitable, they do not want to take. It is no wonder that many experts believe the success rate of perpetuating a business beyond the first generation is only 3 in 10.
Business owners who do consider the future quickly conclude that status quo is not an option to capture future growth. They also realize they control of how and when they will eventually transfer a business that took part of a lifetime to build. Therefore, succession planning should not be synonymous with “exit,” but rather with crystallizing a vision for the future for the business.
It takes a well-thought-out process to decide when and how the business will be managed or transitioned to protect the business, its employees, its customers/clients, and its value, as well as to whom you ultimately want to leave or sell the business. The transition planning decisions that an owner makes now, or elects not to make, will be a major factor in deciding the future of the business. Many business owners wrestle with the same three decisions:
- Have I properly planned for the management or perpetuation of my business in the event of an unforeseen occurrence, such as death or permanent disability?
- How and when will I perpetuate the business into the future while realizing value for what I have built?
- How do I continue to effectively grow and scale my business to ensure a more viable, stable, and profitable firm?
The creation of a transition plan must be unique and tailored. The details cannot be found in white papers that discuss the most common approaches: each entrepreneur created his or her business to be unique and not to be like everyone else’s.
All of this seems like common sense; yet, why are business owners so reluctant to act?
We start with the obvious: privately owned businesses are intensely personal enterprises. Many owners maintain very close control and oversight over all aspects of the business; they tend to make all key decisions and resist delegating responsibility. They also tend to be very involved in operational aspects of the business and are private with respect to the financial results and other aspects. This style of leadership adds to the anxiety concerning what will happen when the business owner is no longer around to lead. It also causes tremendous uncertainty and confusion surrounding operations and decision making when a successor eventually takes the reins.
Because of the nature of these businesses, owners often make a series of mistakes that hinder an effective transition. People find it difficult to discuss issues related to illness, retirement, or death, so they ignore them. Lack of time is also cited as a reason for neglecting to plan, but the reality is that a business owner’s day-to-day activities are seldom more important than planning for the future success of the business.
Efforts to achieve a successful transition should be undertaken as part of an ongoing process, not as a onetime succession-planning event. But early planning can be pivotal. It helps business owners regularly meet their stated objectives and facilitates the continuity of their businesses. Succession plans with longer time horizons are not only “exit plans” but also a vision to fuel continuing growth.
While a business owner may have no interest or desire to transition the business today, they still must contemplate an eventual transition and work to be in the best possible position at that time of transfer. Thinking about and actively weighing pros and cons on a continual basis will not only substantially increase the likelihood of a successful transfer, but also will establish a mindset of running the most efficient business possible.
The practical truth to transition planning is that there will never be a clear picture of the future. An effective transition plan needs flexibility. An owner is the steward of the business during his or her lifetime, but there will come a day when the ownership interests will be transferred to another party. Entrepreneurs don’t like to think about this, and that leads to the unfortunate driving error of failing to have a plan for the crossroads ahead.
Paul T. Lally is lead principal – wealth management enterprise solutions at Wipfli LLP. He can be reached at firstname.lastname@example.org.
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