Succession planning

We usually think of entrepreneurs as being in the start-up phase. But eqully important to entrepreneurship is the succession phase or planning for what will happen to the business when you move on or retire. Succession becomes an important process that needs to be planned for years in advance, especially when

• the business has value not totally dependent upon you, the entrepreneur owner, or
• if family members are involved in the everyday operations of the business.

“We became Champion JogBra so that we had a broader appeal. Suddenly we had a brand that everyone knew, not just a small niche brand of JogBra.” Denni McCann describes the purchase of Jogbra by Champion. The marketing clout of a large company's backing had positive effects on sales.

There are three main succession scenarios that entrepreneurs should consider.

1. Selling your business for profit to Insiders

There are three main options for selling the business to family or employees.

• Cash buyouts (CBOs)
• Leveraged buyouts (LBOs), and
• Employee stock ownership plans (ESOPs)

Each has advantages and disadvantages. One of them might be a better choice for you or your business than the others, so you need to consider them carefully with financial and legal advice.

Cash buyouts require one or more employees to buy the company. It may be important to you to select new owners who will run the company in the same spirit and with the same values as you have. This may be more important than the highest purchase bid.

In leveraged buyouts, managers or employees borrow money from financial institutions to purchase the company. Unfortunately, they often take on so much debt that they have little flexibility to manage and make changes to existing operations.

Employee stock ownership plans give a group of employees who purchase stock a share of the profits and voting rights in the company.

2. Selling your business to outsiders

Businesses can be sold to outsiders as a private sale or public stock offering.
In a public sale, one or several people may own and run the company. They may have a board of directors to advise the officers. But the board is appointed by the officers.

“With selling the company, I had to sign a 3-year contract to remain with the company as did my five top executives.” Peggy Hart Earle describes the selling of her company, Hartstrings.

When company stock is offered to the public we say that the company is "going public" or has made an initial public offering (IPO). A board of directors is elected by the stockholders. Both the board and the stockholders (based on how many shares they own) will vote on the actions of the firm. Before considering an IPO, the firm must be sure that the public is interested in buying stock in the company. This requires advice from legal and financial experts.

3. Selling the business to family members

Some entrepreneurs groom a family member as successor for the business, believing, as is often the case, that the business will be most prosperous by remaining in the family.

By involving family in the business long before the founder retires, planning carefully, and choosing the right family members for key positions, the company can continue its profitability in the future.

There are a variety of legal approaches to transferring a business to family members that are best discussed with a lawyer.