When a longtime leader or business owner is ready to step down from their current position, it can have a significant impact on a company. Employees may respond differently to a new leader and business sales or stocks may take a dip, depending on how influential the leader is.
Whether it’s a member of the C-suite, a longtime manager or the business owner themselves who’s retiring, it’s essential to have a solid plan in place before handing over the reins. Below, 14 members of Forbes Finance Council discuss the financial implications businesses must address when a significant leadership change is on the horizon.
1. Replace Departing Leaders From Within
You must prepare to replace that leader in your company and have someone who’s trained to step into that role. Promoting from within the company has been the best approach for us when losing a key member of our team. For our partners, we have key man insurance in case something happens to a person who is key to driving business revenue. Without preparation, you are preparing to fail! – Joseph Lustberg, Upwise Capital
2. Anticipate How The Change Will Affect Employees
Your business must anticipate how the change will affect your employees. Prioritize your key employees and customize incentive plans to ensure the value drivers in your business remain satisfied with their positions throughout the leadership transition. A transition that leaves your key employees unhappy can be detrimental to the financial success of your business. – Brian Slipka, True North Equity Partners
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3. Consider The Owner’s Effect On Cash Flow
It’s important to understand the implication of the owner’s effect on the cash flow forecast. Do they bring in new revenue with new clients? Do they run certain expenses through the business that would go away with their exit? Do they personally guarantee any of the credit lines for the business? – Meredith Moore, Artisan Financial Strategies LLC
4. Have A Plan For Maintaining Internal And External Relationships
Small companies are often direct reflections of the personality and ethos of their leaders. It is important to have a plan for maintaining both internal and external relationships when the leader steps down. A mismanaged transition could lead to customer or employee churn, which could have significant financial impacts. – Glenn Hopper, Sandline Global
5. Deepen Relationships With Key Accounts
Beware of losing customers to longtime competitors. Deep relationships with key accounts need to be proactively nurtured when a key leader is exiting. Key leaders have maintained these customers for a long time, and those partners have likely been courted by the competition along the way. Competition often sees departing leadership as a “land grab” opportunity. Don’t underestimate the power of relationships. – Drew Gurley, Redbird Advisors
6. Build A Long-Term Financial Model
While a leadership change can be a significant upheaval, having a company with efficient financial systems leads to a smoother transition. Correct financial reporting, accounting practices and governance systems start with the leadership team, so make sure these foundations are set before a significant leadership change. A financial model for three, five and ten years out is a strong element in a succession plan. – Peter Goldstein, Exchange Listing LLC
7. Work With Advisors To Address Tax Implications
In many cases, the owner of the business is the major shareholder. This could cause a disaster in terms of taxes if there hasn’t been careful planning. A team of advisors should be involved in this seemingly easy, but actually complicated, transition. There are solutions to avoid these problems, and in some cases, it could be the end of the business if they’re not addressed. – Christopher Drake, Drake Consulting Group, LLC
8. Properly Calculate The Leader’s Intrinsic Value
When a business owner or key leader is ready to step down, a full understanding of their intrinsic value must be measured prior to the execution of the transition. If the reach of the departing leader’s intrinsic value is incorrectly calculated, significant unplanned costs can occur through the impact of decreased productivity levels across a multitude of channels. – Kacey Butcher, Adaptation Financial
9. Add Up The Costs To Cover Everything The Departing Leader Does
How much of the current customer base and general business development is the result of work by the owner or leader? It takes time and delicate maneuvering to foster and transfer relationships. You may end up needing a team of people to replace the owner, some for client management and others for business development. The commissions and salaries alone may end up dwarfing what the exiting leader costs. – Aaron Spool, Eventus Advisory Group, LLC
10. Determine What Will Happen To The Leader’s Equity
One of the biggest questions in these situations is, “What happens to the equity of the leader who’s stepping down?” It usually requires a lot of soul-searching to arrive at that answer, because an owner has so many options. Once that’s clarified, advisors can help put the structures in place to make the vision a reality. – Todd Sixt, Strait & Sound Wealth Management LLC
11. Balance Continuity And Innovation
Businesses are built around relationships, and you have to keep those customer relationships in mind whenever there is a leadership change. You also need to balance the continuity of operations with bringing in a successor who is open to innovation and change. – Paul Davis, Strategic Resource Management
12. Ensure There’s Buy-In For The Transfer Among Employees
Your employee teams have a significant impact on your company’s finances. Great teams generate the maximum return with the least amount of effort. You must be open and honest with them about the transition, creating buy-in before the transfer takes place. After all, it’s your team members who will do much of the work to ensure the transition is as smooth as it can be. – Justin Goodbread, WealthSource Partners, LLC
13. Safeguard Strategic Relationships
Losing the leader could carry multiple costs: revenues, negotiated pricing, replacement compensation and key staff may all be impacted. Leaders are rainmakers, and as such, they are strategically connected to vendors, clients, partners and staff. Safeguard your strategic relationships. Take the time to forecast financial impacts to fully understand what the exit means moving forward. – Cynthia Hemingway, Fourlane, Inc.
14. Be Prepared For Employee Turnover
Leadership changes can create chaos among employees that must be managed. Being transparent about leadership changes and anticipated company changes will minimize employee turnover. Employees are the cornerstone of any business, and incurring recruitment costs due to high employee turnover can hurt. Companies should expect turnover as employees devoted to original leadership retire or change jobs. – Jared Weitz, United Capital Source Inc.