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The Importance of Succession Planning

By Generational Equity

05/01/2017

One of the most important tactics that a business owner can pursue is the idea of grooming and developing an eventual replacement. Unfortunately, far too many don’t address this issue in a timely manner and are left forced to do so when one of the Big D’s hit – Death, Divorce, Disablement, Disagreement, and Disinterest.

This is how Kenneth Greenberg of Auctus Search Partners, LLC describes the importance of planning for succession:

According to a recent study by the Center for the Middle Market, 45% of middle market businesses face challenges lining up successors for critical roles in the business…

Middle market businesses are frequently overly dependent upon owners and a few key executives for core competencies and the company’s strategic vision.

Business owners that we meet usually state that their No. 1 reason for failing to adequately plan for their succession is simply a lack of time. This is largely overcome by identifying a successor early in the life of the business and beginning to mentor several years before the planned departure. Again, Greenberg puts it this way:

Even if a transfer of control isn’t in the business’ near-term plan, it’s crucial for owners and their senior leadership to identify and develop a bench to fill key executive roles. The bench can be internal existing junior executives that are developed into leaders; external recruits with deep industry knowledge and leadership skills, or a combination of both.

We recognize that the idea of “developing a bench” of associates to be mentored and groomed for key roles to many entrepreneurs is a non-starter. It takes time, hard work, and forward thinking to do this. But the value to you as the business owner will pay off later when negotiating with buyers. As we have said for years, buyers hate risk and try to avoid or minimize it at all costs. If a business is dependent on the current owner for key daily decisions and no successor has been prepared (or even identified), many buyers will be concerned.

The issue you need to realize as a business owner is that you could be leaving thousands and thousands of dollars in unrealized value on the table. To protect that value, all you need to do is hire, train, and mentor a solid person to replace you. When you consider the impact on your financial legacy, it makes sense to go through a succession plan replacement program.

Need more information on how to do so? Please use these links:

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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