One of the biggest changes your business will inevitably experience is a transfer of responsibilities.
Transferring important responsibilities to someone else can be exciting and nerve-wracking. Whether you’re transferring ownership to a family member, or departmental responsibilities to a long-time employee or next-level manager, you may want release valves for if things don’t go as planned.
Fortunately, there are ways to hedge against risks while still pursuing these goals.
Why Worry About Transferring Responsibilities?
Transferring ownership or major company responsibilities is often a necessary step in planning for a successful future.
In a nutshell, planning for a successful future requires you to achieve financial independence. To achieve financial independence, it’s often the case that your business must be able to run successfully without you at the helm.
Thus, it’s important that the person or people who take over your responsibilities can adequately perform in ways that allow you to achieve your goal of financial independence.
So, what can you do to protect yourself and your future when your financial independence relies on giving up some (or all) control of your business?
Establishing Guardrails For Ownership Transfers
A great way to stay in control, even while you give up control, is by establishing guardrails for the people who take on new responsibilities.
Because you still own the business, you get to define the conditions of what a transfer of responsibility looks like.
For example, say you want to transfer ownership to a business-active child. This child has proven herself in the field, but she may also have personal issues that could harm future success, such as alcohol abuse.
In this hypothetical scenario, you may create a business plan with your advisors that adds a condition to transferring ownership to this child. For instance, to qualify for shares of ownership over time, the child must quit drinking, attend support meetings, and the like, while still hitting her business goals.
Creating Written Performance Standards For Ownership Transfers
On the other side of the coin, you may want to transfer responsibilities to someone who has a ton of potential but not enough experience.
Say you want to transfer the business to a child with an MBA from a prestigious school but very little real-world experience. You might create a written plan that specifies certain performance standards, such as hitting an ambitious but realistic growth quota over a certain number of years.
A planning process like this can help answer several important questions.
Is my intended successor able to do this?
Does my intended successor really want to do this?
Will this successor allow me to achieve my goals?
If it turns out your intended successor can’t handle this, you may still have time to pivot to achieve your goals.
Attach Golden Handcuffs For Non-Ownership Transfers
If you don’t intend to transfer ownership, you will likely reach a point where someone else needs to take over a certain set of responsibilities in the pursuit of more success. For instance, you may need to install a Director of Sales to spur growth toward your goal of financial independence.
Whether you hire or promote someone into this position, an effective strategy is to consider golden handcuffs. Golden handcuffs are incentives that motivate an employee to stay at the company while achieving ambitious, realistic performance standards that directly affect your plans for a successful future.
It’s of little use to you if a high performer finds a better offer somewhere else right as you’re preparing to hand over the reins. In many cases, business owners use vesting strategies to keep key employees motivated and present as they move from being the hub of the business wheel to a spoke.
We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.
Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.