An internal succession or ownership transition plan is a great option for many businesses. Rather than selling to an outside buyer, an internal succession plan involves the founders or current owners (sometimes referred to as G1 for Generation One), selling their shares to their senior associates or key employees (G2 for Generation Two). Business that are ideal candidates for internal plans include professional service firms and financial advisory firms.
For those of you considering an internal succession or advising clients considering one, take a look at this list of seven key factors that I’ve learned over the years make an internal succession more likely to succeed (this is not really a “how to” article but rather the key ingredients for a successful transition):
- G1 and G2 have many personality traits in common (you could even take an assessment tool like Meyers-Briggs or DISC to see if you are aligned).
- A reasonable difference in ages but not too wide of a gap (10-20 years is ideal; it’s important for G2 to be experienced and know how to run a business, but still young enough that they want to keep working for another 10-20 years).
- The people in G2 each have their own book of business.
- G1 and G2 have shared visions/values and common goals for the firm (if some parties want to maximize profits but other parties want to balance profits with lifestyle goals or treatment of employees, that may not be a good mix).
- The flexibility and willingness to adapt or change the terms of the plan based on changes in circumstances.
- This one is huge: trust. It’s essential for the parties to trust each other, so neither side gets suspicious that the other is trying to take advantage of the other.
- Most important of all: start the process early! Especially if you don’t even have a G2 yet. G1 needs to hire a G2 and groom them to take over the business before G1 can get bought out.
G1 can rest assured that planning the transaction is not the same thing as exiting, and G1 can maintain control until they are ready to pull the trigger. G2 can buy in gradually in tranches and/or pay part of the purchase price up front and the remainder over time, to lessen the cost and spread out the payments. I talk about some of these strategies in previous posts, including Ownership Transition Plans and Top Ten Tips.
I hope you’ve enjoyed this list of Seven Keys to Successful Succession. Please feel free to share with others or reach out to me if you have any questions or comments. Thanks!
This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.