If you plan on selling your business to a family member or manager, it’s vital to groom your successor for a smooth transition.
A poorly prepared successor can jeopardize your business legacy and imperil the value you get from the sale. That’s especially true if you help finance the sale with vendor financing. If the company runs into trouble, you may have trouble getting your money.
“We often see owners get started too late on the process of grooming their successor,” says Robert Duffy, Managing Director in BDC’s Growth & Transition Capital team.
“It’s not something you do overnight. It’s rare for a second-generation family member or manager to be able to step into a CEO role without active mentoring.”
Duffy, whose team finances business transitions, gives these six tips for finding and preparing your successor.
1) Start early—Many entrepreneurs make the mistake of waiting too long to start grooming their successor. As a result, they’re often forced into a rushed transition—for example, when a sudden health crisis occurs.
The amount of time needed can vary widely, but it’s normal for a successor to need five or more years to learn how a business works, gain the needed expertise and build relationships with customers, employees and suppliers.
2) Choose the right successor—The ideal successor will want to build on your company’s success and have the knowledge to do so. During the grooming period, they should be willing to fill in important gaps in skills or qualifications.
If there’s no obvious family or management successor, consider looking for an outsider who is a good fit. You can invite them to work with you in the company during a grooming period, with an eye for them to eventually acquire the business.
3) Identify and rectify knowledge gaps—Identify the successor’s knowledge and skill gaps and then work with them to establish a plan to rectify them. This can be through formal learning, informal job shadowing and mentoring by you and other team members. The person can also gain on-the-job experience by working in various roles in your company.
4) Document processes and develop a strong team—Define and document repeatable processes in your business that your successor can learn. Also, create an empowered management team that will support your successor and complement his or her skills and expertise.
5) Think early about financing—It’s unlikely that a family or management successor will have sufficient funds of their own to buy your company outright. That means you’ll have to think early on about how to help them finance the transition. It could mean using a mix of vendor financing, buyer equity, term loans and mezzanine financing.
“The degree to which you can come up with a creative way to finance your exit may determine whether you can exit with value. A common pitfall is not recognizing that there are many ways to structure the transaction,” Duffy says.
6) Consider exiting in stages—A phased exit may allow for a smoother transition. You could gradually step back from day-to-day management in stages as you transfer responsibility and ownership.
Article provided by the Business Development Bank Of Canada. For more information please visit www.bdc.ca.