The #1 Problem in Business Transition Planning – “No Plan B”

By Paul Cronin, partner - STPI

It’s funny, but for the all the wisdom many business owners have, it’s rare that they make a “Plan B” for their retirement or exit. Their “plan” often sounds like, “I’ll just pass the business on to my son or daughter”, “or, I’ll just sell it”, or worse yet, “I’m never leaving it”.

Let’s look a little closer at each of these:

One: “I’ll just pass it on to my kids”. This could also be called, “After I pass on the business, I plan to not spend Thanksgiving with my family ever again, because my kids will hate each other and my wife won't be talking to me either” plan. “Why so?” you may ask. Because adult children may be remarkably smart, astute even, but sibling rivalry doesn’t really care about that – go ask Cain and Abel. A really smart guy once remarked to me that passing on a business to the kids should be a felony – for child abuse! The truth is that kids have different needs, talents and ambitions. What nearly all of them lack is wealth (liquidity), because just like mom and dad, – it’s mostly in the business. The best way to equitably share the wealth is to sell the business and share the proceeds. But that is often complicated by the nature of the business and the emotions of the owner (and family). Quick story: A business owner had been grooming a child to enter and take over the business; the child attended a prestigious college, did some work in the business, and got to know the managers. The owner’s “exit” plan was to “work 3 days a week” on projects, while the child and managers ran the business. Then, the child went off to business school and worked with top notch professors and students with amazing business ideas from around the world. The owner forgot to ask the child about his dreams. The parent then realized that, in their child’s eyes, “mom’s business wasn’t so sexy anymore”.

Two:  “I’ll just sell it in five years”.  This could also be called, “I sure hope that I can sell it someday”.  Hope may be a real place in Arkansas, but that doesn’t mean you could live there. Many businesses never sell; they just fade away (have you popped into your local stationer lately?).   If you are fortunate to have a viable business, you face a daunting task of creating enough value in it to retire.  If you do that, you have issues of market timing, credit-markets, finding the right advisors, and of course finding a willing buyer.  If you sell a business in less than 18 months, it may likely be with a disappointing outcome.  There is hope (damn that word) though, if you start to PLAN NOW for a sale in five years, you have a solid chance.

Three:  “I’m never leaving it”, or as I like to call it, the “I’ll be perfectly healthy until I’m 92, then I’ll just fall asleep one night and not wake up” plan.  Oh the magic of it – no pain, just peace.  Of course, 90% of us will die in a hospital, surrounded by life-extending equipment and tubes inserted to bodily parts that cannot be described in this post.  That means most of us will become disabled for a significant amount of time, then die.  A time when we cannot run a vacuum, let alone a business.  This is how businesses fade away.  If the business has a lot of debts and the owner has done limited planning, it can also spell doom for the finances of your spouse.

So what’s a “Plan B”?  Simple, it’s really a series of options for how a business might transition: Sale to third-party, Private Equity Recap, ESOP, Management Buy-out, and so on.  You need to hire a team of experts to help craft the options and work the options to arrive at the best one for you.  One member of that team should help you create “personal transition plans” as well, to get you emotionally ready to do serious business transition planning (that’s what we do).  Another key person must manage the wealth being transferred “out” of the business and “into” the personal accounts of you, the owner.

If you own a business, you need to start planning your transition - yesterday.  If you advise business owners, please share this with them – you would be doing them an enormous favor.

Paul Cronin is partner and Director of Business Development at STPI, the Successful Transition Planning Institute in Cambridge, MA.

About the Author

Paul Cronin, Director of Business Development

With over 25 years of sales, management, consulting and entrepreneurship, Paul Cronin brings a broad spectrum of professional experience to the Institute. His background includes being part of the team that grew Eden Toys, a small NY-based toy manufacturer, into $90 million dollar company. Over a 17 year span, he grew from…

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