Don’t wait until you are burned out to transition your ownership

One of the biggest traps I see family business owners fall into is the “I’ll sell my ownership when I retire” trap.  Remember, the only reason to get into business is to get out.  And getting out is a lot harder than getting in.
 
There are many family business owners who proudly tell me they have reinvested all the business profits back into the business.  While this is probably a good idea early on, at some point, owners should begin to invest outside the business, diversifying their investments and reducing risk.  The goal isn’t to get to 65 and have all your net worth tied up in the business.  You wouldn’t invest all your net worth in one stock, yet business owners do it all the time with their businesses.
 
I have found that if ownership and leadership transition doesn’t begin when owners are in their 50s, the likelihood of a successful family transition drops dramatically.  Children aren’t going to sit around forever waiting for dear ol’ dad to start selling his stock and transferring power.  The children often have significant roles in the business, so their departure can have a very negative impact on business value.
 
Additionally, if owners don’t begin to transfer their major responsibilities and relationships in their 50s, they will further lock themselves in the business, and again, business value will take a beating – who wants to buy a business, when after the sale, all the knowledge and relationships walk out the door with the former owner?
 
Exiting a business and getting your net worth out takes time.  Whether the Buyer is an Insider (family, key management, etc..) or a 3rd Party, prepping your business to maximize its value is a process that can take five to ten years.   If you wait until you’re burnt out, you risk leaving millions of dollars locked up in unrealized value.  You just simply won’t have the energy or passion to do what’s necessary.  And this assumes your health will remain strong and life won’t throw any curveballs like divorce, distress, or a spouse’s illness.
 
If you are in your 50s, you should be thinking ‘de-risk’.  Start investing outside the business, reducing the stress of the business being your sole source of retirement funding.  Begin the process of identifying your successor and develop them.  Start transferring your key roles and relationships to others in order to build value in the team, not just in you.  I’ve seen more than one family business that had ‘value’ on paper, but was unsalable because all the knowledge and customer relationships were tied up with the owner.
 
And finally, don’t do this in the dark.  Meet with other family members in the business and discuss these important issues and challenges at least annually.  Hire a coach to help facilitate these conversations and work towards a succession that preserves and protects value and wealth, not jobs for the family.  Be smart and find the end before the end finds you.