Turning the Business Over to the Next Generation

It’s time to turn the business over to the next generation. They’re already here; they’re doing the work. And I’m ready to play, to do other things, to lay down the responsibilities I’ve carried for so long. What do I need to think about?

Thoughts of the day: Securing the business for the next generation is an act of maturity. First you have to figure out what you want to accomplish. Build a team of skilled local advisers to help you. Build a timeline to help you stay on track.

Letting go is hard for any business owner. The business is your baby, your legacy. When the next generation takes over, they’ll have their own ideas, which may be different from what you wanted. You’ll have to get out of the way.

When it comes to shareholders and long-term business success, the most productive ownership outcomes:

  • Are internal to the business, focused on and fully committed to achieving long-term growth, profit and stability for the business.
  • Are knowledgeable about the business and stay current with best practices related to growing a profitable, productive, long-term business.
  • Understand and commit to the value of written plans and skilled talent and tools.
  • Have rules resolving shareholder disputes and votes that end in ties.
  • Ask yourself, as you prepare to give up your shares:
    • How much money do you need to live on, for how long, and how does that compare to what the business is able to pay you for your shares?
    • Do you want to be done as a shareholder now or later; will incumbent shareholders stick around in case of delays?
  • How many family members work inside the business, who receive shares and what goes to family outside the business?
  • How ready are shareholders to act for the best interest of the business?
  • Discuss the rights and obligations of ownership with your next-generation candidates. For example:
    • Shareholders have the right to profit distributions in proportion to the percent of total shares they own and will have to pay taxes on those profits.
    • If the company gets into financial difficulty, shareholders may be asked to lend money to the company or otherwise provide financial coverage.
    • Shareholders will be expected to make time for the business — attend meetings, make major decisions, go on record by voting their shares, meet with a board, management team and outsider advisers.

Get incumbent owners to practice acting as governors of the business. Ask them to sit in now to learn how the business is run and decisions are made. Give them room to try their hands at ownership and watch how they handle themselves before you turn over shares.

Think through who will advise on the sale of the business. You’ll need an accountant and an attorney, as will the business and the future shareholders.

Some decisions will be governed by the business structure: S corporation, limited partnership, C corporation, etc. Well before it’s time to transition, get a handle on the trade-offs of each structure.

Make sure your advisers are experts in the laws of the state in which your business is registered. Check references and credentials, and verify expertise conducting successful shareholder transitions. Working with someone local is a real advantage; it makes it much easier to get all of your advisers together for discussion when needed.

Build a list of the things you’ll have to do, with due dates. Get your head around your own future outside the business. Prepare the next generation of owners/managers for success. Practice stepping back from active involvement. Factor in time for the transaction to unfold legally.

Looking for a good book? Try “The Complete Guide to Selling a Business” by Fred S. Steingold.