When business owners begin thinking about transitioning into retirement or leaving the company for a position elsewhere, they should be focusing on how they address the needs of two key groups—shareholders and stakeholders.
Shareholders are people or corporations who own part of the business through stocks or equity. Stakeholders are those interested in the performance of a business for reasons beyond stock performance Shareholders are always stakeholders in a business, but stakeholders aren’t always shareholders. For example, employees, customers, vendors and children of business owners could be stakeholders despite holding no equity or stock.
Informing both those groups and listening to their feedback is similar, but we want to highlight a few differentiating factors to be proactive about and transparent to each of these critical groups. Executing a smooth transition is helped by foresight on protecting shareholders and stakeholders. If business owners bring astute preparation to their transition plans, everyone involved in the business will likely be more at ease once the successor takes the reins.
Be transparent with shareholders early on
“Identify the goals you want to share with shareholders early in the process,” says Amanda Vella, senior director, Business Advisory and transition consultant at ATB. “Shareholders own the business and need to be more onside with the transitions plans as soon as possible.”
Vella cautions business owners to hold off on informing other stakeholders, such as vendors and customers, about any concrete transition plans until all details are confirmed, and the date of that transition comes closer. “You don’t want those plans to get out into the marketplace until the deal has been closed, because the uncertainty around a transition could cause customers or employees to leave which could negatively impact the deal or even prevent it from closing,” she adds.
It’s a good idea to make sure communication flows freely between all the shareholders and the business owner. As a Deloitte report states, “Businesses of all types can help address these difficulties through the use of formalized governance structures that open the lines of communication,” which may require adding an advisory board to provide the business owner with guidance.
Once they are ready, business owners should also be open with stakeholders. It can be incredibly beneficial for owners to engage them as much as possible, provide them with information and solicit feedback on the transition plan.
Career transition advice for approaching customers, employees with transition plans
Employees are the lifeblood of any business, so owners shouldn’t keep them in the shadows too long about transition goals. According to the accounting firm Meaden & Moore, “Key employees must be confident and engaged even when they are not offered the prospect of ownership. And all employees have an important financial interest to the extent they are dependent upon the business for their livelihood.”
“I highly recommend a compensation structure to keep KPIs in place,” says Vella, “whether those are sale or net income targets, and perhaps even make bonuses available once the transition is finalized.”
The Deloitte report echoes Vella, writing, “From a succession planning point of view, compensation strategies can help retain and encourage important company leaders who have an important future role to play, but who will not be owners.”
Strategic planning to address stakeholder needs should also turn to what vendors may want to hear from a business owner about to leave the company. Vendor relationships can have more impact on business performance than you might imagine. Vella says business owners might want to re-examine their supplier agreements, or draft new ones, to ensure no sections are nullified in the case of a successor taking over the business. This problem usually doesn’t crop up often if the agreement is made with the corporation, she adds, and is usually more of an issue in an asset deal when the legal corporation may stay with the seller.
The financial manager Karen Firestone, in a column in the Harvard Business Review points out the urgency behind ensuring vendors and clients are comfortable with the next executive in charge. “The closer you are to departure, the more you need to convince them that your colleagues are as good, if not better, than you,” she writes.
An effective transition will be inclusive and forward-thinking. Involving all stakeholders in the plan at some point helps to ensure no one is surprised or moving in different directions due to miscommunication.
Find out more about selling your business successfully with ATB’s Business Transition Guide. Want to talk some more? For tailored advice around business transition planning reach out to our Business Transition team at firstname.lastname@example.org