Exit planning is a necessary part of the overall strategic planning process for privately-owned companies. It will not only be the largest financial transaction of a business owner’s life, exit planning places your company in the best possible position once you leave. One of the most significant factors to consider is how, and to whom, the ownership will transfer.
One common transition strategy is to transfer the company to an insider, most often a family member who is already working inside the business, or a non-family member who is a trusted employee.
There are significant benefits to the business owner when transferring ownership to an insider. Most important is the control it provides throughout the exit process and the ability to define and execute the exit objectives you identify. Transferring ownership to insiders makes you the banker and can increase your profit at the time of transfer. This choice also helps maintain the stability of your company. Rather than creating concern among and potential loss of key employees, the insider-transfer option typically reassures, motivates, and retains key employees. When you remain a part of the process, it becomes part of your company’s overall strategy and reduces risk to your company and everyone involved.
But how do you identify the right insider to whom you transfer the business? There are three key elements that should be true of the insider you choose:
- He/she has a direct and significant impact on the net income and the related value of the business.
- His/her combination of skills and experience would be very difficult to replace.
- He/she will make a meaningful contribution to the strategic future of the company.
Some other things to consider as you choose your insider include the following:
- Have you had ample time to observe the individual in action?
- Does he/she think like an owner?
- What are their strengths?
- Are there gaps and if so, where? Can they obtain the knowledge they need?
- Does the individual reflect the needs of the business’ future?
- Do the other employees respect this individual?
- Can he/she build upon what you’ve accomplished and take the business to new heights?
- What are other considerations specific to your business and its future?
Once you’ve identified the insider to whom you wish to entrust your company, it’s time to consider exactly how that will be happen. I’ll discuss the six common transition strategies for transferring to an insider in my next blog.
The exit process can seem daunting and takes longer than most business owners realize; however, taken in steps, it is quite manageable. Planning is the key to writing your own future. For more information, take my online exit planning assessment or feel free to contact me.