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Exit & Succession Planning Blogs

You have worked hard over the years to establish and grow your business through the good and challenging times. Your vision and beliefs are what molded this organization and its culture. What are your plans if you suddenly or gradually can no longer actively involve yourself with your business? It may be hard to look ahead and address that question, but the organization’s future is a strong ongoing concern. If no succession plan is in place, then you could deal with your legacy fading away, being liquidated, or quickly sold to entrepreneurs who may not have your values. All this simply because you never had a business exit strategy in place? 

Reflecting On an Exit Strategy.  

Below are some ideas to consider when developing exit strategies: 

1) Do you have any close family member(s) or valued employee(s) who are capable of managing all aspects of business operations and whom you would trust with your company in the future? 

2) Do you have personal or family financial considerations that need addressing? 

3) Has your intention always been to build and cash out? 

4) Are there any close or complementary competitors who share your values? Are you willing to sell to them at some point? 

5) If you have an exit strategy in mind, do you want to sell out 100%, or do you want to have an equity or debt holder’s position in the company? 

6) Would you want to stay on for a few years as a paid advisor or employee of the company regardless of an equity or debt holder’s arrangement? 

7) An immediate consideration: Does your estate and legacy planning include the continuity or disposition of your business? 

All these questions above may be uncomfortable to consider, and we may eliminate some outright. However, you should still develop a succession plan.  

Modifiable Exit Planning Strategies. 

A good exit planning strategy is modifiable and adapts as situations in your life change or the business goals evolve. Yet, always remember you should have an end game in place while you continue to manage and grow your business. 

Communicating Exit Plans to Employees.  

When developing an exit plan, be careful only to share ideas and concepts with your closest trusted advisors. Consider outside professionals with whom you have a long relationship and who would not necessarily profit significantly through a change of ownership. You can also consider close family members since they are affected by your decision. Remember that people may develop ulterior motives if they stand to profit substantially from the change of ownership. Many family members can be adversely affected or harbor resentments if fair and equitable decisions are not made or communicated. 

Any accidental or intentional dissemination of these discussions to employees or into the industry will likely cause rumors to occur, damaging morale, the company’s public image, and even sales volume. As an example, let’s say a key customer hears you may be selling out at some point. They may consider moving their business with you to a competitor for the long-term security of their business plan. Or if you discuss with some key employees the business valuation and give them the impression that they may gain some equity in the enterprise and you later change your mind, you will undoubtedly have a trust and morale problem. 

Deciding the Business Methods of Succession and Controlling Partners. 

1) Close Family Member(s) or Valued Employee(s) 

If you already have a family member(s) working in, or interested in, joining the family business, they are often the first you’ll deliberate to take over the company eventually. Some key considerations follow: 

– Can the person or persons manage all aspects of the business? If not, what development training do they need to move up the skills ladder and allow for a smooth transition? 

– The tough question is, does the person have the capability to manage all aspects of the business? If a family member can handle most of the critical business functions, then do you have or can you hire a professional to give the organization strong management across the board (e.g., sales professionals, CFO or Controller, Ops Manager, etc.)? For these non-family members, there needs to be accountability, goals, and incentive pay to motivate them. After some time, consider a small ownership % also. 

If you want pivotal employees or all employees to take over the business, there are a few options to consider. 

– If no family members want to continue ownership in the future and you believe an ESOP (Employee Stock Ownership Plan) buyout with all the employees or a selective buyout by some key employees would be a good option. For the founder to liquidate their ownership, an ESOP can be phased in over time and be leveraged or non-leveraged1. Seek professional help on this before you communicate any of this to employees. 

2) Retain Family Control without Family Management 

– If you do not have family members interested in working in the industry but still want family ownership control, you’ll need an exit plan to promote or hire talented professionals to run the company for the potential investor looking to purchase the business. As mentioned above, one must implement the same incentive pay schemes. These concepts are a multi-year process. Setting up an ESOP trust may also be appropriate. 

– Remember that a strategic buyer cannot expect the business to run on autopilot. Consider establishing a board committee with regularly scheduled meetings to review results, strategy, investment opportunities, etc. Contemplate using outside professionals to participate on this board (e.g., accounting, legal, banking, industry knowledge, etc.) 

3) & 4) Has your intention always been to build and cash out & potential buyers? 

– The common term for this is “Flip the Business.” It is appropriate if you are using the business as an investment stepping stone to move into other types of industries or investments, and you want the cash vs. having an income stream from the startup business. Your goal, in this case, is to either get a specific net after-tax dollar amount to finance future ventures or maximize the sales price of your current company for financial freedom. 

– Other considerations would be whether it is the right time to sell the company economically. Ask can the company be sold to a competitor, sold to private equity, sold to a local company, or an individual venture capitalist, or solicit entrepreneurs that may want to enter your regional market. 

– Other considerations are the welfare of existing management and employees. If you sell to a local competitor, there is a likelihood that they will consolidate your company, and some or all of your former employees will become redundant. 

– Will your company be a good fit with any potential buyers under consideration (e.g., reputation, quality, investment in your local community, etc.)? 

– Are you concerned about legacies (e.g., company name, product line branding, etc.)? 

– As best that can be legally structured, settle any outstanding claims on your business and ensure the new owner assumes all current and future liabilities (e.g., EPD issues, product liabilities, future claims, etc.). 

– It will take time to find a potential buyer, and due diligence is required when the prospective buyer or their proxies come into your business to examine your data room (all pertinent financial and business-related records). Thus it is best to put in place confidentiality agreements with them. Even with these agreements, rumors about why these people visit will circulate. Communicate to your customers, suppliers, and employees to manage harmful gossip. Consider offering retention bonuses to key employees as exit options. Here is also an opportunity to provide an ESOP if acceptable to you. 

5) Retaining an Equity or Debt Holder’s Position in your Company? 

– An equity position can be achieved through an ESOP as explained above or a majority (>50%) or minority shareholder (<=50%). This section addresses ownership by a limited number of people and not an ESOP. 

– A majority interest would lead to a silent financial partner or an active management position. Either could work, but it is really up to what you want at that point in time. 

– A minority interest would mean you do not have a day-to-day say in the firm. However, you will be sharing in the company’s profits and losses. As a minority interest, you may also be an investor. You may invest money to cover cash needs if the business needs a positive cash flow to cover expenses, invest in capital, or for a corporate expansion. 

– You would have a limited say in how the company operates. First and foremost, it would be through your industry knowledge and influence over the other shareholders. However, you can be outvoted in the decisions if the majority of the owners do not agree with you. 

– A clear and concise legal agreement will need to be in place, agreed to, and signed by all new owners. 

– Holding a promissory note with your former company would be a way for you to finance liquidating the business. It could be either non-convertible or convertible into equity. With the former, you should have a lien on the organization, and with the latter, you can convert the debt into equity. In either case, this would occur if the new owners cannot meet the obligations to repay the debt. The new owners could be family members, former employees, outside investors, or a combination. Depending on how much cash the owners can pay upfront, you can partially liquidate your investment and be paid the rest of the business’s value sometime in the future. This contract relies highly on how well the new owners can manage and grow profitably. You also will not have a say in how they operate and invest in the firm. The worst case with a convertible note is that you may have to step back in to help manage the business if the new venture begins to fail. Timing on doing this will be crucial. In any case, you must put a comprehensive legal agreement in place to protect your interests. 

6) Paid Advisor Position with No Equity or Debt Ownership 

– Many times, a new owner may want you to stay with the firm for a fixed period to safeguard sales and profitability during the post-acquisition transition period. Extending the owners’ stay is often requested when you have unique relationships with key customers and suppliers that may be new to the buyers. This process gives the buyer time to integrate your operations into theirs and develop those relationships. Private venture capitalists may want you to stay on for an extended period until they find a qualified replacement to manage the ongoing corporate or commercial activities. The private equity owners may be new to your industry. Other private equity owners may already have businesses in your industry, and a shorter transition period can occur since they are likely to roll up their common ventures. 

7) An Immediate Consideration: Estate Planning that Includes Your Business 

Recognizing Estate Planning Within Your Exit Strategy.  

Cogent Analytics works with you on soft skill issues and provides tools to develop a sound and successful exit plan. Yet, we do not offer estate planning for small to medium-sized businesses. We can make recommendations for legal advice in this area, but this type of professional needs to have experience with both state and federal corporate laws and estate planning. We recommend that you obtain reliable local advice. 

If you still need to do this, estate planning is a critical area that needs addressing even before you have the time to develop and put in place good exit strategies. One thing to keep in mind is that the estate planning may need to be modified after you have a clear exit plan. As described in this paper, business succession planning takes time and is best thought through carefully with good advisors. 

An existing exit strategy is critical because you cannot predict when you may be incapacitated or die due to an accident or illness. Therefore, it is helpful to have some basic estate planning in place as soon as possible to protect your business and wealth. 

4 Estate Planning Options in a Business Exit.  

Assuming you do not have a trust in place that addresses the continuity of your company2: 

1. Sole Proprietorship: the company becomes part of the estate.
2. Partnerships: an unincorporated partnership dissolves at the time of the death of a partner. The net value of your share of the partnership goes into your estate.
3. Limited Liability Corporation (LLC): Business may continue, but the LLC must state what happens to the deceased’s share of the firm. The estate can take over the deceased’s share or dissolve the LLC, and the net value of the appropriate amount for the departed goes into the estate.
4. S and C Corporations: The deceased owner’s firm shares become part of the estate. The business continues as an entity unless the new owners agree to sell or liquidate according to the articles of incorporation.

Various Ways to Manage the Tax Effects When a Business Owner Passes3: 

If your organization’s legal structure is in the 1, 2, or 3 listed above, your share of the business will go to your estate. “The current estate tax exemption ($12.06 million in 2022) is so high that most estates do not pay any estate tax. However, a small business could put an estate over the limit. Also, the estate tax exemption scheduled for 2026 is to be cut in half, and states will have their own estate taxes, which means that tax planning in the now is crucial. Put your company assets into a trust or a separate business entity like a limited liability company to lower your estate tax burden. 

– Trust. A trust is useful to reduce estate taxes and ensure the continued running of your legacy if you die or become incapacitated. Because a trust passes outside of probate, you can transfer the assets within immediately to a delegated person chosen to run the company without waiting for the entire estate to go through probate. In addition, if you become incapacitated, the trustee can continue to run your organization without court involvement. 

– Buy-Sell Agreement. Buy-sell arrangements can be beneficial if you own your business with others. Buy-sell agreements are used if one of the owners dies, leaves the company, or becomes incapacitated. It specifies who can buy an owner’s share of the firm, under what conditions, and for what price. 

– Life Insurance. When you own a company, life insurance takes on new importance. A life insurance policy can ensure that your family continues to receive an income in the event of your death. It can also provide funds to keep the business running and be used to fund a buy-sell agreement.” 

Additional Exit, Succession, and Estate Planning Considerations4: 

– Operating Agreement: with multiple owners, you should address specific day-to-day management questions that will arise. For example, Who takes over temporarily? How are long-term decisions made? Will the surviving business owners buy out the deceased owner’s estate? 

– “Buy-sell agreement: A buy-sell agreement is a predetermined sale triggered by the death of an owner or some other event. This type of agreement allows one partner to sell their ownership to another without the other party’s consent at the time of sale. The agreement contains a price at signing, which could be a fixed price based on fair market value or some other valuation method.” 

– Sale during life: an agreement that allows a smooth transition of business ownership before a major event occurs, like the death of the founder or an owner. 

– “Private annuity or self-canceling installment note: Private annuities and self-canceling installment notes are special ways to sell a business, typically used within a family. With an annuity, you sell your company in exchange for the annuity.” 

– “Grantor retained annuity trust: A grantor retained annuity trust (GRAT) is a special type of trust that takes title to your business interest. You retain the rights to your share of the firm’s income for the rest of your life. Upon your death, your beneficiary receives the interest held by the trust, which helps to bypass the probate process.” 

Summarizing the Exit Planning Strategies.  

As a small business owner or a medium-sized owner, you should now understand that succession planning is more than just hiring and developing people to take over your leadership role in your company. That is only a small part of what should be your considerations. Extensive exit options are also available for your estate planning related to your organization. 

You need to address the inevitable situation when you cannot participate in managing your company either partially or entirely. It would be best to have successful exit plans that allow for a smooth transition, so the business’s value and legacy do not have a negative impact. Considering your family and significant others in exit planning is also helpful. In addition, you need to hire good professional help and get sound advice from trusted individuals, possibly those who have already gone down this road. Listen to their successes as well as any regrets. Hasty or delayed decisions and implementation may not ensure the legacy you have worked hard to create over the years. 

What is succession planning? Succession planning as an exit strategy is one of the most rewarding and financially beneficial processes a business owner goes through to receive payments for their time and work developing the business. Owning a business, in large part, is growing the value of your work and ideas through equity so that your company becomes a valuable asset not just to yourself but also to any potential investor or buyer. This value realization comes through the capitalization of business assets, the cash flow, and the cash it turns into net profit each month. Being able to convert hard-earned equity that was grown over the years can only be realized after you depart from the business or your reduction in time and responsibility while remaining with the company if there is a business exit strategy.

Through either a continuing legacy with current leadership participating in taking over the reins and a continuing draw for the relinquishing member/owners or a form of sale of ownership to those internally, where the business owner can cash out on the value of the business in a lump sum or combination of a down payment and additional payments for a fixed period. This exit strategy enables current talent to buy control of the business via an employee stock ownership plan with the end goal of turning over ownership and completing a successful exit strategy. In the simplest terms, this comes down to how a business lives on and survives the people currently in it. That is the question an exit strategy must answer. But often, in trying to do so, we as business owners get caught up in many pitfalls of the spectrum of human behavior, born weaknesses we pass on in our DNA.

Three human conditions that wreak havoc on exit strategies. 

The three pitfalls that destroy exit planning success are emotion, personal identity, and ego. They can cause havoc in our minds and cause us to make poor decisions producing results more like the three stooges than the three wise men.

In my experience working with small and large businesses, the change in the leadership process often ignites emotions. The basics of who will lead the company trigger personal identity and when change should occur stimuli ego. The apprehension in addressing these uncomfortable topics can be a blind spot for business owners. This unawareness causes procrastination, derailment, or failure in exit strategies. Planning left abandoned hits with the reality and panic that you are out of time and have lost the ability to put in the physical or mental effort required to keep leading the company. Worst-case scenario, the lack of an exit planning strategy makes the company die. 

Another tragic loss these three topics cause when they become negatives is not utilizing or developing valuable talent within the company. Often this delay results in some of the best talent being lost to opportunities elsewhere as they feel underutilized or at a legitimate dead end in their current role. In comparison, a business exit strategy can provide them with a future vision.

The stress of an exit plan may cause us to respond differently. 

Keep in mind, as normal human beings, we are hit with these three things every day and should develop normal healthy responses that result in engrained pathways in our brains. In typical situations, this is our day-to-day personality. However, when we are in stressful situations, experts have discovered that we pivot from our normal behavioral patterns in dealing with stress and often use tactics more related to primal survival tendencies engrained deep in our DNA. These overriding basic behaviors remove our own healthier normalized responses. When we are proactive in our tactical responses through the development of self-awareness, we keep control. 

Self-awareness in business is like being the 4-Star General in the command center, keeping calm, reviewing as much information as possible from the battlefield, and considering each action and decision carefully and methodically. To continue the analogy, a business owner who is not self-aware is like the Hollywood celebrity who, while viewed as a figure of authority and can speak persuasively and convincingly on a range of subjects, may have a shallow understanding of the subject matter. If your knowledge base is low, peer pressure and trends may easily influence you more than data and results. These individuals frequently speak out of emotion that is short-sighted and harmful in the long run for real durable success.

Avoiding the three common exit strategy emotional traps. 

Let’s break down emotion, personal identity, and ego one at a time to establish models we can use to neutralize the negative responses and promote the positive attributes as each of these relate to succession planning.

Emotion

In forming and executing a successful exit, you must remove emotion from the process. Instead, facts, KPIs, and historical data should be the key to developing a common exit strategy and seeing through any bumps along the way. In some ways, a succession plan is more like a marathon. At the beginning of the marathon, there will be training – the emotional acceptance of letting go of control, considering and accepting a new identity (we address in the next section), and new possibilities in your time and daily lifestyle. In the middle of the marathon will be running – patiently seeing the exit plan through and keeping to the process. You must support, monitor, even encourage and cheer on the business plan to the finish line. But, once across the finish line, that is not the end. Owners must prepare to accept the results of the race. 

An owner who now has to face living a new daily routine and no longer going into their office may feel their identity changed. They must deal with and prepare for these emotions not to overwhelm or take control. Further, owners must emotionally prepare for new ownership making decisions they would not make themselves. They must be able to handle hearing that the direction or image of the company, they were once a startup founder and built from nothing, is changing in a different direction. Some of the best ways to work through these emotions are having a solid base of healthy people around and structuring an array of activities to invest time. Becoming involved with community groups and charities and focusing on family are often things a successful person strives for in this new phase of life. The venture capital acquired, and the financial freedom enables their professional and financial success. In short, be prepared emotionally to move on to other things. If needed, do not be ashamed to have the professional help of a great coach or therapist to help you resolve emotions along the way.

Personal Identity

As we touched on above, emotions often play hand-in-hand with our personal identities that we consciously or subconsciously make part of the enterprises we build. Those who are more engineering-minded and like to be active in kinesthetic ways often move toward the product side of the business. Then there are those of us who rely more on our personalities’ communicative and planning aspects and are drawn more to the service industries. Most of us have seen these situations play out in reality TV. Popular shows like “Orange County Choppers” that used to run on Discovery Channel showcased the flamboyant and larger-than-life personality of Paul Tuttle Sr., whose identity and personality made him the poster child of a mainstream biker and motorcycle manufacturer. On the other side, we have seen specials on famous business owners, from Steve Jobs to Oprah Winfrey. Each business owner has built their organization in a way that directly reflects their personality. Where this comes into the exit strategy is that as an outgoing business owner or one selling out of leadership, we must prepare to see a change in the personality and image of the business we built. When developing our succession plan, we must be okay with removing our identity from the future of the company. Of course, there are those companies where this may be a bit sticky. Removing Paul Newman from Newman’s Own salad dressings would be different. But in most business exit strategies, new ownership or the transfer of leadership amongst business owners should be seen as a valuable opportunity to bring in new life, new energy, and a way to keep a business current so that it does not succumb to failure through stagnation.

I would even argue that prior to exit strategy planning, one of the most successful ways to ensure that a business does not become stagnant, falling behind its competitors, is to purposely try and keep the personal identity of the ownership out of the external perceptions of the business. As an example, when you buy your iPhone, did you consider the dysfunctional and often abrasive historical personality of Steve Jobs when you made your purchase? Or did you buy your iPhone, more than likely aware that Steve Jobs was a founder and major owner through history at Apple, but not care as you felt it was the best phone for you available at the time in the market? I argue that you likely purchased the phone for the latter. Controlling your identity in your business is critical to successful legacy planning.

Ego

Now, on to a person’s sense of self-esteem or self-importance – ego. Can we see how the ego naturally comes from emotions and our personal identity? If a person is too focused on their identity, as we discussed above, that nearly meets the definition of egotistical. Similarly, if the same person is displaying a lack of focus on historical insight due to being triggered by their ego, you can then say that person is being emotional. This cycle is commonly seen daily in the workplace. Do you understand how this directly relates to exit planning? Business succession planning requires humility and the ability to share victory and credit with others for accomplishments achieved with the realization of the employee value as a valuable part of the company. 

Business exit strategy planning is not just a way for owners to profit from the things they accomplished with their business but also to benefit from all things as a whole that every individual achieved. Companies can only survive succession if they can stand independently without the departing owner. One of the essential traits of a truly successful business owner is their ability to raise up and improve others around them. 

Simply put, they encourage and equip others to grow professionally, personally, or both. Now, I said “equip” and not “make.” This statement was deliberate; as the old saying goes, “you can lead a horse to water, but you can’t make them drink.” In a way, this saying is its mini succession plan. If you inspire the horse to drink for itself, its victory is also a victory of the person who led it to water. The person or persons chosen to succeed, the current owner, or owners, must have their egos in check and exhibit true leadership qualities for the exit strategy to fully be realized and last with the next generation of ownership. Succession planning is an opportunity for all parties to check their gauges for how accurately they manage their own egos and continue in life. We are back to the development of personal identities and control of emotions, bringing us full circle.

Business self-awareness and strategic exit planning.

In summary, we take personal identity, emotion, and ego out of the exit strategy by committing to the work of being self-aware, planning, and not procrastinating in tasks we do not enjoy. As a business owner preparing for a change in ownership, either leaving or coming into ownership, you must be secure in your personal identity and healthy self. At the same time, health in all aspects determines and controls your emotions and responses to stressful situations so that you control your emotions through the marathon of the transfer of ownership. Lastly, we must limit ego to a tool of motivation and use our humility to establish the value of the business and all of its people. We must avoid getting caught up on ourselves or bringing in a poor choice for ownership, who sees the position as a way to selfishly exalt themselves, ultimately leading to the destruction of the business and failure of the exit plan. If you can adhere to these principles, you will be able to have a successful succession plan free of the pitfalls of negative human behavior. Lastly, you will enjoy the fruits of your labor with newfound financial freedom. Buy that sailboat, go on that journey and look back at the accomplishment of the business you were able to pass on to enrich others’ lives.

When going through the process of succession planning in a business, the most important part of the exit strategy process lies back before the process begins, in the actual planning phase itself. When business owners come to the point in their lives where it is time for them to find a potential successor to pass the torch, it is often an emotional and stressful time that can catch them off guard and be hard to navigate. Solid succession plans with measurable KPIs are key to transferring ownership to the future leader. Furthermore, the CEO succession planning document is just as important as the original business plan.

Document your succession plans.

A succession plan can and should be viewed as a living document. It should match the context of the business and lay out answers to various questions that can come up. A solid succession plan handles the different situations that could lead to the succession of an owner or owners not named as possible successors. Taking the time to have a solid business succession planning program is insurance to help underwrite the future of your business. A succession planning strategy is not just for the expected times of transferring ownership during retirement or growth but also in those unexpected times of being unable to lead any longer through disability, change in priorities, or something unexpected.

Focus on professional development.

In order to drill down to the most important aspects of succession, we should consider those universal across all scenarios of leadership transition. The focus must be on the potential leaders involved in the succession process, how we measure their performance and how we must build leadership role accountability along the way.

Every employee is a potential successor.

On a macro level, every employee hired is part of the talent pool and considered a part of the succession plan. Every employee employed in a business must be a deliberate hire, qualified, and committed to the business’s future success. From day one, every person is an internal candidate; thus, given a complete and accurate job description, the tools needed to perform their job, the skills and ability to do the job, and they should be measured for growth and consistency from the beginning to end of their service.

Introducing KPIs into effective succession planning.

The reason that it is important to lay the groundwork at a new employee’s initial hire is that healthy businesses promote and encourage employee development from within, besides attracting and acquiring human capital from outside resources. This process creates the funnel that guides great people to key leadership positions. If a business begins with a pre-made model and has organized measurable KPIs for each role, owners can track data over time, and when the opportunities arise through growth and reorganization, an internal candidate can take the position. After all, how often have we heard of an executive with ownership started on the ground floor?

While readily accepted in many internal subsects of business, such as inventory, finance, sales, and others, KPIs are often overlooked and underutilized in managing a business’s human capital.

So how does this relate to succession planning? 

Adopting a model of immediate and consistent tracking of each person’s performance within a company provides necessary historical data. At the time of succession planning, this information answers challenging questions not found in a sales report or financial document. Supervisors rate their subordinates with a standard practice applying equally to all employees on a scale of one to five. Once tracked for a substantial period, these KPIs provide a non-emotional collection of data. When in need of people for promotions, this data is searchable all the way up to executive leadership and ownership. 

KPIs give a point system to rate from weakest to strongest for individual performance and employee development in non-numeric performance categories like leadership ability, attitude, consistency, self-development, teamwork, communication, professionalism, technical capability, eagerness, respect by peers, and more. All values assigned provide the business with an accurate scorecard for accountability and enrichment and are also used as the talent pipeline to find qualified successors. Using KPIs consistently allow companies to see the story behind a person’s journey through their organic ascension in a business.

KPIs safeguard the succession planning process.

At the same time, using KPIs in context with effective succession planning also helps bring to light nepotism, stop popular but unqualified candidates, and recognize overlooked talent that are good choices for successors. Businesses run into succession management issues due to our cognitive distortions that affect how we perceive others. These misconceptions can lead to considering popular but unqualified candidates to assume ownership and not weighing under-acknowledged high-potential employees.

Frequently, “soft sciences” of tracking workplace performance without KPIs can be misleading and full of distorted information contaminated with personal bias, fear, overlooking flaws for an entertaining personality, and even inappropriate relationships in the workplace. When these situations present themselves, having documentation available backing up choices for the selected candidates for succession is verifiable and has supporting collateral for the decision. Conversely, it also creates documentation for supporting collateral when someone should be removed from their position or realigned in a new role. These KPIs and the documentation they provide should ensure the ascension of a good choice for a potential leader taking a critical position or becoming your successor, as well as stop poor choices.

Avoiding the successor discussion stalemate.

Too often, succession planning meetings over who gets the leadership position get stuck in a stalemate over a difference of opinion, nepotism, unintended personal biases, or honest disagreement over who should take over ownership. Using a model of integrated standard KPIs throughout an employee’s career allows succession meetings to have reports and documents with actual data that, when deliberated, provide objective results that keep the discussion moving forward. An exit strategy without this data is like a “shoot from the hip” with a “gut feeling” on who would be best to ascend to the successor. In business, this can be the kiss of death for its future and destroy years of hard work and accomplishments along with your legacy. There are no shortcuts in the succession planning process, only careful planning and honest deliberation based on current data.

Choosing the correct successor with KPIs.

Adopting a leadership development model of using and tracking KPIs for human capital in your business from day one of employment tracks employees’ careers through measurable, comparable, documented aspects. It ultimately simplifies complicated exit strategy situations and leads to great qualified candidates in the talent pool for succession, protecting the future longevity of your legacy.

One of the unforeseen aftereffects of a global pandemic has been an ongoing broken supply chain. Many companies have relied on a constant and consistent stream of products and raw materials from established suppliers. Having lasted and profound relationships with your suppliers is a good thing. However, in this current supply chain ‘crisis,’ many suppliers cannot get you what you need to run your business. Hundreds of container ships floating offshore with no one to unload them as well as a transportation shortage of drivers and trailers compound this phenomenon.   

This means we need to apply creative thinking to find ways to get our much-needed raw materials and products. Without a doubt, our costs are going up. The classic supply and demand premise is busily at work. Big Box retailers and large conglomerates have the advantage of deep pockets, tight supply agreements, and huge influence. This puts the rest of us in search of alternatives to fill our supply needs. In addition, many critical items have been put on ‘allocation.’ This means that each customer only gets a portion of what has been ordered based on what is available, or worst case, gets nothing while more significant customers get at least some. For multi-location businesses, this can be problematic.

What do these supply chain shortages mean to your business? Besides having to pay more for materials and products across the board, backorders, out of stocks, and lack of raw materials, your business cannot sell what it cannot produce or put on the shelves. One key material or part can stop your production lines from running or your customers from coming into your storefronts.  

Find Alternative Distributors and Sources

While working closely with key suppliers usually is a good thing, it is even more critical now. It is essential to understand the upstream issues they are facing as well as your own. They are not purposefully withholding supply and are likely working to resolve the shortages as well. But we cannot blindly rely on their efforts or what has worked in the past. 

We must seek alternative suppliers and distributors. Sometimes the product is available, but not from the traditional sources. Sometimes this may be a short-term problem that might resolve if given enough time for your traditional sources to get the product.  

But if your business relies on a steady stream of materials or products, it will serve you well to seek out alternative suppliers and distribution channels. Be aware, though, many of these alternative suppliers are facing the same or similar shortages and give a ‘first priority’ to their existing customers overtaking on new ones. In fact, many suppliers are not returning calls or ‘ghosting’ requests for a product from new customers due to meeting their commitments to their existing customers. 

Other suppliers want more of your business than just the products in short supply. Therefore, you need to analyze the impacts of having a single source for all of your products and consider spreading your supply spend across multiple sources. This is a common practice among manufacturers who rely on a steady stream of parts and materials to keep their production running at an efficient rate.

If you see your competition can get these materials or products, ask your sources why they cannot provide them. If they cannot resolve the issue, seek alternative solutions, including buying from your competitors at retail and selling at cost for key items. While this may sound like heresy, sometimes having one product out of stock will cause your customers to buy the related items, often with higher margin, from one place that has them all. Or, if it is raw materials, this tactic can keep your production lines running and turning out sellable products.

Go Straight To The Source

While going up the supply chain is not always an alternative, it can provide insight into other channels that might have the product in inventory that you were not previously aware of. Perhaps, you might find that the manufacturer is close by, and your volume is such that they are willing to sell directly to you. Related to this tactic is picking up the product from these sources using your own transportation or arranging transportation on your own. Since the shortage of trucking and transportation has exacerbated the situation, anything you can do to provide transportation that you have an element of control over can be extremely valuable. There are many potential outcomes, but we are all in this together and applying prudent tactics to obtain supply are the things we must do to sleep better at night, knowing we are not just standing still but trying to resolve the supply issues.  

Find Alternative Materials and Products For Your Business

Sometimes a leading brand or product differentiates itself by its key ingredients. If this crucial ingredient is in short or no supply, consider using the alternative product that may not be as ‘good’ but might be available. Sometimes these are obvious choices, but often you need to look to find the alternatives that will do the job or provide the materials. Some suppliers ‘stockpile’ key ingredients in order to level out their cost. These suppliers may have key ingredients where others might not. Therefore, diligence is called for in searching out alternative products, materials, and solutions.

Redesign Your Supply Offerings

If you have applied some of the creative methods mentioned above and still cannot find a supply, consider redesigning your offering. For manufacturers, this can mean redesigning around a material or parts shortage. If the current part is made with material that is in short supply, are their alternative materials that would be as good or better? The move over the last few decades to ‘outsource’ our supply to the global economy has had an enormous impact on our current situation. Consider seeking out or starting back up domestic supply for critical items. You may pay a somewhat higher price, but higher costs are better than no production and no sales. In the case of one commercial vehicle manufacturer, they had to redesign their complex assembly to source it domestically. While this was a significant investment, the alternative was idle production and a lack of sales. Not doing these things can cause even good companies to go out of business.

For a retail sales company with multiple locations, they needed to re-think what they traditionally carried in their retail outlets. A common statement from retail store managers is ‘we can’t sell what we don’t have.’ 

This motivated the company to add complementary products and impulse items that their typical demographic might purchase. This was in addition to acting using the strategies above. Maintaining retail traffic and existing customers is key to survival. This is commonly known as ‘pivoting’ your business model from its well-established core. 

It can be risky, but the alternative is to become paralyzed and a passenger on a sinking ship.

We must be proactive in resolving our supply chain issues. This may well be a short-term phenomenon, but can we risk waiting? The backlog of supply and the shortage of transportation and transportation workers is significant. Best case, it will take months for this to begin to return to normal, if it ever does. We must apply creative energy to fully understand our unique situation.

As a business owner, you are used to thinking ahead concerning your business strategy and taking care of finances. But do you take enough care of your personal strategy and finance? Many business owners are so involved in their business that they forget about their private future. As a business owner, a business might go bankrupt, and you do not have the same safety net for retirement planning as an employee. 

Start to build your private financial future early.

“A journey of a thousand miles must begin with a single step.” Lao Tzu, ancient Chinese philosopher

You should start to think about your retirement now! An analysis shows:

• When you start at age 15, you need to save 8% of annual income for life at age 30.
• You need to save 21.4%, at age 40.
• You need to save 43.2%.

 If you look at your personal finances, there should be a certain degree of saving that you should have. 

Compound interest rate and dividend growth compounding work in your favor

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t… pays it.” Albert Einstein

The compound interest rate describes the interest on the interest. Reinvesting profits leads to an exponential return on your investment. There is an interesting story to explain what the compound interest is: An Indian man invented the chess game in the 3rd century. The king of that time was impressed. He asked him how he could pay the inventor for his great idea. The inventor said that he wanted a single rice corn on the first field of the chess game, and it should be doubled for every field. The king thought how much of a modest man the inventor was. However, the king did not realize that for 64 fields, a total of 18.4 quintillions (10^18) rice corns must be paid. This is more rice than available during that time on the entire earth. 

Take risks – but do not take uncalculated risks.

“Risk comes from not knowing what you are doing.” Warren Buffett

The different asset classes are associated with different risks. Within an asset class, risks can vary a lot; however, each asset class itself carries a particular risk that is being categorized by institutional and private investors. Cash, Cash equivalents, and bonds are generally considered low-risk assets. Equities (mostly stocks) and real estate are considered medium-risk assets; meanwhile commodities, modern investments (e.g., bitcoin), and passion investments (e.g., art) are considered high-risk investments. 

As there is no asset class without risk, a strategic asset allocation mix helps you to distribute the risk among different investments while still being profitable. 

You do not need a financial consultant to invest

“If you’re so smart, why aren’t you rich?” Introduction of The Riddler in Batman

Whenever you take financial advice from a professional, you will pay for it one way or the other. Bank consultants are trained to sell you overpriced products, e.g. you charging additional 5% to buy a fund or a high annual fee. Independent financial advisors will charge you on your profits without taking responsibility for your losses or they will charge you a flat fee which reduces their interest in you making a good profit. Depending on your level of motivation to invest on your own, a financial consultant might be helpful. But always keep in mind: If you really want you do not need a financial consultant and if you need one, be sure he will charge you. There are so many people working in the financial industry which promise you great profits. However, most of them are not specifically rich. It is scientifically proven that most professional investors do not achieve higher returns than any individual investor. Probably you are your best advisor! 

Become an investor – not a speculator or trader! 

“The individual investor should act consistently as an investor and not as a speculator.” Benjamin Graham, the grandmaster of Warren Buffet

Investing is fundamentally different from speculation and trading. Investing means putting money to increase personal wealth over an extended period of time with a balanced risk. Investing is based on facts and conditions that allow you to be as much in control as possible with the smallest risk possible. While investing, you should reduce costs as much as possible. This leads to buy and hold strategies. Reinvesting profits and using tax optimized approaches to maximize profits and reduce risks is part of investing for your personal retirement. Speculation and trading, in contrast, are short-term approaches with a high risk that the average investor ends up with negative returns.

Markets must grow with time

“The overall point is that new technology will not necessarily replace old technology, but it will date it. By definition. Eventually, it will replace it. But it’s like people who had black-and-white TVs when color came out. They eventually decided whether or not the new technology was worth the investment.” Steve Jobs

Markets grow in the long-term. On the one hand, there is inflation. On the other hand, the population in the world is growing and technology is progressing. Along with the global population, average wealth is increasing as well. This means that there will be a constant growth in the long term. According to projections of the United Nation, the global population will be 9.8 billion in 2050 and 11.2 billion in 2100. 

Technological development is faster than ever. The Time artificial intelligence will reach human intelligence by 2023 and the intelligence of all people in the world by 2045. Be part of this development! 

Conclusion: Constant investment is important! ETFs are a possibility to invest with low cost and low risk

“The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time because you’ll be buying into a wonderful industry, which in effect is all of the American industry…People ought to sit back and relax and keep accumulating over time” Warren Buffett

The asset allocation determines the risk and return of your investments. Low-risk investments such as bonds currently offer small returns only. High-risk investments are an expert-only area. This leaves you with few alternatives: equities and real estate. Real estate offers good investment possibilities but also means additional work. Equities, mostly stocks, must be diversified. You can purchase single stocks, funds or ETFs. ETFs have recently become widely popular as they allow you to diversify your investments in the same manner as with a fund at a price a little higher than what you pay for stocks. Therefore, ETFs are an easy choice with diversification included. Other asset classes can be added if you feel comfortable, e.g. passion investments in art, whiskey, wine or classic cars – but only if you have the knowledge. Bonds on the other hand can be a safe investment with guaranteed (low) returns as a counterpart for more risky investments. However, ETFs offer a great basis for your investment strategy. If you want to learn more about investing and build your own investing strategy, check out investmentcanvas.com.

About the Author

Jan-Patrick Cap, MBA, Ph.D., is a mechanical engineer working in top strategy consultancy. In his doctoral studies, he focused on innovation and network management. He worked in Europe, the USA, Brazil, China, and UAE. His passion is finance and entrepreneurship. Jan-Patrick is the co-founder of investmentcanvas.com, a website that offers a free academy and tool to learn to invest with a long-term perspective.

Disclaimer: All content provided is for informational and educational purposes only and is not meant to represent trade or investment recommendations. Reliance on this content for the purpose of engaging in any investment activity may expose an individual to a significant risk of losing all of the property or other assets invested. Any person who is in doubt about the investment to which this document relates should consult an authorized person specializing in advising on investments. The author is affiliated with investmentcanvas.com.

It may be hard to fathom the reality of selling your business. You had a goal to grow and build your business, and over years of work, your energy, your vision, your customers, based on your value stream, is now realized after years of working towards that expected goal. A succession plan is vital when you have decided that it is time to exit your business, and move on to your next life adventure.

Have you planned how your dream will succeed without your ingenuity and magic touch or even the input from critical personal? For many small businesses, succession planning is only a wish list at the forefront of business owners’ minds but on the outskirts of actionable plans. Removing oneself from the day to day nuances of the business to having comfort in knowing that the company will sustain profitability in the event of retirement or leave. It is a plan that takes critical thought to divest the owners’ mentality in working on the business instead of for the company. Succession planning is vital in the current scenario of tight talent market management. It is a strategy in transitioning essential functions and roles to employees having standby reinforcement. You built it now; it’s for them to keep it. Succession Planning consist of identification of the following for a specific outcome:

1. Key positions and status (Critical, Impending, & Potential Vacancies). Knowing what roles are vital for backup is essential in maintaining strength and focus on operating the business successfully.

2. Potential Successor is where talent management comes into play, identifying relevant knowledge, skills, and abilities.

3. The timeframe of the leave status of key individuals ensures the framework for which plans need to be implemented. This allows an opportunity to strategize their retention potential and mobility transfer potential of identified potential successors.

4. Gap analysis which defines the competencies required to perform specific role functions to include leadership and behavioral identification skills that are needed for senior positions.

5. Training requirements, either internal or external, brace the company for success. Training, although costly, is an investment in the future of your business and is critical to the future success of your company. Ongoing employee training helps develop employees and increase their experience by engaging in challenging duties, which in turn helps to build loyalty to the business. Employees need to be productive, efficient, exceed standards. While adapting to improve skills in several areas, including communication, critical thinking, and problem-solving.

In so doing, you will well-position the employees who will assume new roles or functions. It brings focus to the process of identifying critical attributes of your business and addressing weaknesses found in individuals that will be considering those functions. Strengthening talent has a direct impact on bottom-line results and contributes to organizational growth. It is an opportunity to help employees learn new skills for development, targeting strength, and ensure greater worker engagement. Hence development at talent level is a must for overall organizational growth.

When you decide to exit your business, it is important to have a succession plan. Succession Planning will make the transition of ownership flow more smoothly for your employees, existing customers, family, and yourself.

At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:

Cogent Analytics, LLC is a business management consulting firm, with a primary focus to help small to medium size, privately held businesses achieve success and long term profitability. Cogent provides powerful solutions with integrity and transparency to privately-held businesses throughout the United States.