Cheryl Strom: Succession planning is not just for retirees, don’t put it off to the end

Entrepreneurs who have built growing, profitable businesses know how to overcome enormous obstacles. Along the way, they have accumulated deep knowledge of their end-markets and make decisions based on decades of experience. Nonetheless, I hear a common line when speaking with entrepreneurs about ownership changes for their long-term transition: “I’ve never done this before.”

Even confident entrepreneurs procrastinate when it comes to planning that involves changes in ownership. Make this critical event go well by considering some dos and don’ts. 

Don’t: Wait for retirement to be the prompt for succession planning.  

Do: Consider selling a portion of equity in your business in order to bring in a financial partner well before you want to hand over the reins. Partnering with a private equity firm, also referred to as a financial sponsor, can result in a game plan where you keep the lead role as well as a meaningful share in ownership. This can give you some personal liquidity, as well as the resources of your partner to undertake bold growth strategies.

Good financial partners bring experience in executing these strategies, committed capital to make them happen and ongoing attention to building out the management team to be ready for growth in years to come. This also helps ensure that your ultimate transition away from the company will not have a detrimental impact on the business. 

Don’t: Put off succession planning because, “I’m so busy right now growing the business.”

Do: Get acquainted with business owners who have sold all or a portion of their company’s ownership to find out about their experiences. Reach out to an adviser, attorney or accounting professional. Speak with investment professionals at a private equity firm in your area to hear how they could help your company grow. The best time to learn about your options is before you need to achieve liquidity. 

Don’t: Skimp on investing in your business before a sale in an effort to boost operating profit. While this might have a short-term effect of making operating profit appear larger, it will be discovered by your buyer and either hurt your transaction valuation or diminish the prospects of a sale altogether. 

Do: Be ready to answer the question, “What would I do if I had unlimited access to capital?” This can be a tough question to answer — you’ll need accurate intelligence about market share and growth potential of your current offerings, new product line opportunities and viability of entering new geographies.  

As you review your business strategy each year, succession planning should be an active consideration, no matter how far away you may be from retirement. You may find that outside capital and resources from a financial sponsor can maximize growth while also fostering a longer-term, multi-step succession plan. Regardless of the path you choose, the best entrepreneurs examine this topic regularly — well before an actual transition is desired.

 

Cheryl Strom
associate director, origination

The Riverside Co., the largest global private equity firm serving the smaller end of the middle market, for seven years.
She also serves on outside advisory boards for two privately held, founder-owned companies.
www.riversidecompany.com