Selling internally can be extremely rewarding. Seeing your chosen successor move into his or her new role with enthusiasm and energy for the future can evoke a feeling of great pride. However, a transition is not something that just happens. As we have discussed in our blogs and most recent whitepaper, The 2014 Guide to Selling Your Business Internally, choosing the right successor that will result in a successful internal transition is not as easy as it first appears. Some of the common problems and pitfalls can be avoided, but they require time, planning, and objectivity.
Financing the Sale
Usually an internal sale is funded through some form of seller-financing or an earn-out period. This presents some unique challenges to consider:
- The continued profits of the company are required to retire the debt and make payments to the exiting owner.
- The successor generally does not have access to adequate capital to make an outright purchase making other funding options necessary.
- Obtaining third party financing, if even possible, can restrict the company’s future growth. In addition, many lenders will be hesitant to grant a loan to the company when the existing owner is leaving the business.
Using creative internal funding methods, such as deferred compensation plans or other internal methods, requires time, usually five years or more to be effective, but may provide some needed liquidity.
Choosing the Correct Successor
As we have mentioned in a previous blog, this is probably the most important consideration for any internal transition. The company’s future viability and therefore your future payments are dependent on the company’s continued success.
- In order to select the correct successor, you must be objective in assessing the candidate’s abilities, attitude, aptitude, and willingness to take on the new role.
- The successor will need sufficient time and training to achieve success in the new role. The role of owner will usually require different skills and abilities than the person has been using in his or her current role. Do not make the assumption that since the individual has been with the company for a long time he or she can just move into this role without proper assistance.
- Choosing a successor as a reward for long-term employment and dedication without careful assessment can have a devastating outcome.
Creating a successor requires time, mentoring skills, and willingness on your part.
- It can be very difficult for you to begin relinquishing control or even daily activities to your identified successor. Even if you are excited about eventually leaving or minimizing your role with the company, this can be a very uncomfortable experience, and the common reaction is take control back. This, however, will undermine your successor’s ability to learn and assume the new role and can sabotage the transition altogether.
- One of the biggest challenges of any internal transition can be the changing relationship with your employee-now-turned-successor. Since the successor is used to the employee role, he or she may readily fall back into the employee role when you are still present, especially when circumstances call for a difficult decision. This will not provide the opportunity for the successor’s need for growth and change. An actual succession plan is needed to guide this process.
- The successor usually is a much younger person and may wish to embrace technology or implement formal planning, marketing, and/or management tools. This can be uncomfortable if you perceive such changes as a challenge to the way you have always done things. Businesses must change in order to have continued growth, and this can cause an internal struggle.
Any transition can have challenges and problems, but an internal transition certainly has some that are unique because of the familiarity between you and your successor. The established relationship must evolve if the transition is to be successful. Internal transfers sometimes fail because the owner and the successor cannot overcome some of the challenges outlined here.
Every transition is unique and requires a specialized plan and time to achieve a successful outcome. Your future and the future of your company will depend on the success of this transition. Plan early and see qualified outside advisors for assistance to ensure your success.
This blog post is just the tip of the iceberg. Download our free whitepaper by clicking below.