A Guide to Succession Plans

When it comes to big, overwhelming projects—like, say, succession plans—the hardest part is getting started. Where do you even begin? Just gaining a basic understanding of your options can seem mind-boggling, let alone gaining enough insight to know which to implement in your own business.

That’s why we wanted to put together a guide to succession plans. While by no means cohesive, here’s a look at the basic options for your business. 

External Buyout 

Who’s It For? 

Profitable businesses in a great location with a long track record of success. Owners should be prepared to completely surrender control of their business—for better or for worse. 

What Are the Pros? 

It’s the dream: someone writes a check for your business, and you get out scot (and debt) free. Owners can retire without obligations (financial, time, or otherwise) to the business. 

What Are the Cons?

Oh, where do we begin. First of all, outsiders may have a very different perspective on the valuation of your business. Your plans for retiring with a big check in Barbados are very likely unrealistic, because an external buyer may only offer you pennies on your investment. Surrendering control of the business is also a very difficult pill to swallow for many owners, especially when doing so may mean the eventual collapse of the business, or its incorporation into a larger structure. An external buyer might not share the passionate vision for the business, not to mention, they may not even be competent or prepared to run the business. 

Internal Buyout

Who’s it For?

Businesses with a strong candidate for ownership and leadership, whether an employee or family member. 

What Are the Pros?

Unlike external buyouts, it’s likely that this new owner is as invested in the business, its future, and its vision as the previous owner. You don’t have to question the intentions of the newbie when you’ve already seen them in action and share a mindset.

What Are the Cons?

Often, employees or even family members don’t have the capital to finance an investment, meaning the previous owner has to back the investment and still hold a stake in the business. Speaking of still holding a stake: in most internal buyout situations, the owner stays involved in the company as an advisor or consultant, meaning you don’t really get to step away, after all. 

ESOP (Employee Stock Option Program)

Who’s it For? 

Companies with a staff that is very invested in the company’s future, sharing a common mindset and goal. Employees are willing to sacrifice to realize the potential of the business.

What Are the Pros?

Employees are motivated to perform well when they hold a personal stake in a company. Owners can retire knowing their life’s work is in many good hands all working toward a common goal. 

What Are the Cons?

In a perfect world, there wouldn’t be any. But this world isn’t perfect, and neither are ESOPs, which is why the majority of them fail. Gaining the common consent of a group of employees—whether 10 or 50 or 50,000—is a difficult task indeed, and can tear a company apart faster than the word “succession.” Organizing an ESOP is difficult from the outset, and requires total involvement, or it just won’t work at all. 

Inheritance

Who’s it For? 

Family-owned businesses with a passionate lineage of potential owners. Ideally, the candidate is already working in the company and preparing for inheriting the title.

What Are the Pros?

Like internal buyouts, inheritance usually guarantees a common perspective and shared passion for the business. In a lot of ways, it eliminates the concerns of the owner about a future of a business without them in it. 

What Are the Cons?

First, owners have to consider if this is a position their family member truly wants? Do they value the gift you’re giving them in the form of your business? If not, you’re actually guaranteeing future failure of the business. In the same ways that planning a will can be difficult, so is creating a succession plan like inheritance that addresses your mortality. 

For an in-depth look at the pros and cons of each of these approaches (and one chinchilla joke), check out our podcast episode titled “______.” In the podcast, Dan Mann delves into the details of each of these succession plans, addresses why succession plans matter and what happens without them, and even talks about our own succession plan here at The Mann Group. 

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