Plan Far Ahead for Change in Ownership

From the October 17, 2003 print edition
Transition Issues

This is the fourth in a series of eight articles on business transition issues.

The only certainty in business is that ownership, at some point, will transfer. Ownership transfer should be strategically planned. You can either take what you get or plan what you want. Identifying your end-game and executing a plan to get there is preferred.

Working in business or on business: Many entrepreneurs started businesses to create jobs for themselves. And years later, many still find themselves treating their businesses as jobs. They are still working in the business, not on the business. Planning for ownership succession is one of the more important aspects of working on the business. It is here we address how the business will continue to have a life of its own, a true business entity, apart from just being your j-o-b.

The opportunity for the entrepreneur is to create an entity that has value with or without personal involvement. In fact, the less the business is dependent on you, the greater the value of the business. The business transition issue we most often face is: Do you want a job or a business entity that has a growing value?

Not only is a planned transfer better than an unplanned one, it is more feasible to transition a business than transition a job.

Building stakeholder value: A remarkable bit of business strategy is found in Stephen Covey’s book “The Seven Habits of Highly Effective People.”

Covey urges readers that when starting a project, “begin with the end in mind.” While this is really applicable in starting a business, initially most business starters are happy to have a job. Better late than never to pick up on Covey’s sage advice and consider the desired end point. The sooner the business owner looks at his opportunity to build an entity with value (rather than a job), the longer the “ramp of opportunity.”

Starting to think about ownership succession causes us to focus on how the business becomes an entity that has a life of its own. That introduces the first opportunity: How does the business work without you? Do you have a successor? Is there resident leadership to perpetuate the business? Is your management staff capable of making this business work without you? Are your key business systems documented and creating predictable, high-quality results? These are the business “value drivers.” The more robust, the greater the value.

Creating choices: To ultimately create the best business value for the business owner, it is desirable to have several ownership succession options. Succession can take several forms: management buy-out, family transfer, merger or sale.

We also need to consider the potential unplanned options: fire sale to pay creditors, the offer out of the blue, or probate.

A planned transition is far superior and helps realize the best value for the hard work of building a business.

Hal Johnson has been CEO of eight companies and has authored two books on mentoring business performance. He is chairman and CEO of LeadershipONE, a business transition consulting firm. He may be reached at (916) 391-3042 or at [email protected].

© 2003 American City Business Journals Inc.