Know Your Options + Plan Ahead for an Effective Ownership Transition
By Todd McDonald, AIF® Certified Family Business Specialist®
What Does a Successful Transition Look Like to You?
Succession planning isn’t just a box to check: it’s a process that takes time, thoughtful reflection, and a team of dedicated professionals. Yet, for many entrepreneurs, it’s often pushed aside. The day-to-day demands of running a business: managing operations, finances, growth strategies, and long-range planning, leave little room to think about what comes next.
“What if I don’t have the time to create a solid succession plan?”
The answer? The consequences can be serious: disorganization, loss of value, fractured leadership, and even the collapse of what you have worked so hard to build.
A successful transition starts with intention and identifying your goals:
- Do you want to pass the business to family?
- Sell to a third party?
- Transition to key employees?
Each path requires careful planning and preparation. Without it, the future of your business and the legacy you have created is left to chance.
Don’t wait for a crisis to plan your exit. Start the conversation now. Build a plan that reflects your vision, protects your life’s work, and provides a successful pathway for the next generation.
Why Succession Planning Matters:
- It requires time, professional support, and clear goals
- Most entrepreneurs prioritize short-term operations over long-term planning
- Delaying succession planning can lead to disastrous and unintended consequences
Key Factors in Succession Planning:
1. Owners’ Intent:
- What are the primary goals of the ownership group?
- How do shareholders communicate their succession intentions?
2. Conflict Management:
- Address controversy, unmet expectations, and family/key personnel concerns
3. Legal Agreements:
- Review and update shareholder and buy/sell agreements
4. Valuation:
- Obtain/update an independent valuation for estate and transition planning
5. Liquidity Matters:
- Update key person life insurance and promissory note arrangements
Business owners often overlook the need to develop the next generation of key personnel. The ability of successors to manage the business effectively is critical for a successful transition, notably, each seller of an equity interest was originally an acquirer of their interest.
Steps Business Owners Have Taken to Prepare for the Sale of Their Businesses
- Observation: Very few owners have set a clear exit timeline. A larger proportion have taken preparatory steps like obtaining a valuation or identifying successors.
Ownership Transfer Options
While many business owners initially consider family succession, it’s often key employees, experienced executives, industry competitors, or private equity firms that present the most viable and strategic option for acquiring a selling shareholder’s interest.
Liquidation Event
The process of a company converting assets to cash and distributing proceeds to shareholders is a liquidation event.
Downside: Liquidation events typically yield the lowest financial value to exiting owners with a value that is dependent on market trends for equipment and real estate.
Key Person as an Acquirer
A key person: such as a trusted non-family employee or executive, often possesses deep knowledge of employee and client relationships, bidding, surety bonding, equipment, and financial management matters.
Downside: While operationally strong, key persons typically lack the financial capital required to acquire ownership in the business.
Competitors or Industry Consolidators
Industry competitors and consolidators bring extensive market knowledge and the financial capacity to complete a transaction, offering a viable liquidity event for the selling shareholder.
Downside: The organization’s culture will likely evolve as the new owners implement operational practices aligned with their own business philosophy, which may differ from the company’s existing culture.
Create an Employee Stock Ownership Plan (ESOP)
An increasingly viable option, ESOPs allow business owners to sell shares to a qualified retirement plan trust on behalf of their employees, Entrepreneurs can choose to sell a portion or all of their ownership interest to the ESOP trustee, who is selected by the selling shareholders.
Employee ownership through an ESOP helps align interest with the success of the business, often leading to improved performance and long-term value creation. This approach “democratizes ownership” and can provide participants with a meaningful potential for a significant increase in wealth creation for ESOP participants.
Additional Benefit: A 100% ESOP-owned company may qualify for substantial tax advantages. For contractors and suppliers in the construction industry, it can also serve as a powerful recruitment and retention tool while functioning as a qualified retirement plan in addition to a company sponsored 401(k) plan.
Downside: ESOPs require ongoing compliance that includes an annual independent valuation, legal counsel, retirement plan testing and repurchase obligation study resources, each professional service is billed as required to the operating company.
Transferring ownership involves more than just legal and financial logistics; it presents personal and emotional challenges as well. Selling shareholders must shift from professional responsibilities to personal pursuits and a broader sense of purpose post-transition. After all, how much time can golf, boating, or other leisure activities realistically occupy?
Supporting a successful transition requires communication, structure and a clear timetable as essential components of any succession plan. Establishing a mentor program and outlining specific responsibilities for each member of the leadership team takes time and intention, but it’s critical to long-term continuity.
Todd McDonald, AIF® Certified Family Business Specialist®
Founding Partner, Wealth Management Advisor
Initiating communication is often the most difficult first step. By engaging early with trusted advisors, you have the ability to create a foundation for a successful plan that is unique to your business and built for long-term success.
How will you plan your future? Let’s Talk!