The Business Owner: How to Groom Key Business Successors

Key Takeaways

• A strong business still needs a backup plan. If your business depends on you, it’s vulnerable. To protect its value, you need someone ready to lead when you step away.
• Start grooming your future leaders now. Let your key people know they’re part of the plan. Give them the tools, training, and confidence to grow into bigger roles.
• Transitions take time — don’t wait. Shifting leadership isn’t quick. It can take years, so the sooner you start, the smoother it’ll go for everyone involved.

 Let’s compare your business to one that would be easy to sell or transfer. Here’s a checklist:

• Your business is consistently profitable – check.
• Superior to competition – check.
• Recession resistant – check.
• Better-than-decent living – check.
• Recognizable brand – check. check, check, check.

By any reasonable standard, you’re a success – except for one thing.

Your business would be in an unpleasant situation without you or certain key people. People like you have a special rank. You are always neighborly and do lots of favors, especially for customers and people on your team. They trust your smarts and initiative, so they’re loyal to you. In the pecking order, you’re the boss, but you’re more than a manager telling people what they ought to do. You’re the leader. You figure out goals and ideals and then motivate everyone else to accept them as their own.  You are exceptional, but you need a plan to overcome what you lack. You need a business successor.

Someday you would like to retire as you step up to chair the board or sell your business outright. But without a successor to run it, your business is going to be difficult to transfer for any amount close to the value you want or need. What can you do about it before your employees, major customers, or suppliers begin to question the future?

To increase and protect your business value, you need others, maybe a team, who can rise to the occasion. Let’s assume you have in mind some capable and qualified people who can aspire to your role. Say they are key employees, or family, or even an outsider you can recruit. Here are some ideas to help prepare your business and your stars for higher things.

• Be deliberate and tell them they are being considered for the business successor’s role or identified as members of the key team.
• Make explicit the chain of command. Draw up an organization chart to spell out responsibilities, accountabilities, and vacancies to fill.
• Consider a written plan to include duties and relationships that need to transition, the transition time frame, and incentives for doing well.
• Train them in specific on-the-job skills and even insist on commitment to off-the-job business study.
• Consider appointing off-the-job activities in trade groups, civic organizations, or similar gatherings that promote know-how and relationships.
• Share financial information. Make sure your key people know how to manage profit, hit targets, and consult with your advisors who might help promote their progress.
• Be prepared to tell your key customers, suppliers and bankers how your plan is designed to guard their accounts and continuity of service.
• Offer a lucrative bonus for improvements to business performance.
• Discourage disloyalty by arranging covenants not to compete.
• Consider retention bonuses for loyalty and cooperation if your absence might trigger others to duck out.

If no key people want to own your business or if it’s too complicated or too valuable for them, find out immediately. Pursue more fitting plans. If you have a successor who can purchase your business, make ready the financial plan. Mapping the money can boost morale and curb anxiety.

Finally, remember that time will be one of the most important ingredients in grooming your management team or business successor. You can transfer the reins of some very small businesses in just a few weeks, but you should expect many situations to require 3-5-10 years. Don’t delay. You are protecting your most fragile and most valuable asset.

Secure the future of your business — starting now.

Don’t let your company’s value depend on one person. LBMC’s experienced succession planning and business valuation professionals help business owners identify, develop, and prepare key successors with a structured, long-term transition plan. From leadership coaching to tax-smart buyout strategies, we’ll help you build a business that thrives beyond your tenure. Contact us to start a customized succession plan that protects your legacy and positions your business for continued success.

Content provided by Alex Ivy, CPA, CFA, ASA. Alex is a shareholder in the LBMC Memphis office.  He provides business wealth planning, valuation and tax services to business owners and their advisors. Contact him at alex.ivy@lbmc.com.