Emotion is a real factor that must be managed when developing and executing an ownership transaction plan. Most business owners know that they need to plan for their business ownership transitions, but emotion often prevents this from happening.
“For years, my Exit Planning goal was to get out of my business on my terms. But I didn’t act until I saw the consequences of inaction staring me in the face.” –A Former Business Owner
“I believe that my exit from my business will most likely occur as a result of planning and action items that I implement.” —80% of respondents to The BEI 2016 Business Owner Survey
The family must also consider the psychology of succession planning, which includes a number of emotional issues that can impact a family’s judgment or even cause the business owner to postpone succession planning. But once they begin the Ownership Transition Process, owners usually find relief in the actions they can take to assure a financially independent transition. So why do 80% of owners fail to have a written Ownership Transition Plan?
“Success depends upon previous preparation, and without such preparation there is sure to be failure.”
Experience suggests that it is unrealistic to expect owners to act on their own initiative or even at the suggestion of an advisor. For any number of reasons, most business owners push Ownership Transition to a later date. Why?
Inaction: A Common Reaction to Solid Advice
Pete Daltry owned a successful municipal infrastructure construction company. He knew he needed to do something to prepare for his business ownership transition. His financial planner referred him to us.
During our first meeting, we did two things: First, we summarized the Ownership Transition Process using examples from prior Ownership Transition engagements. Next, we described the relationship between transferable value and Pete’s role in the business. We then asked Pete which role he played in his company’s major decision-making actions.
“Just about everything that matters goes through me,” Pete said.
We knew that Pete’s role in his business would need to change if it were to have value to anyone else, and we shared our thoughts with Pete. Pete knew that he needed to do something to make sure that his company would still be valuable without him. However Pete did nothing, despite our description of the importance of transferable value, how planning could increase transferable value, and all of Ownership Transition Planning’s benefits.
This refusal to act by shrewd, decisive business owners seems illogical. Why don’t these smart people do what is in their best interests?
Business owners feel comfortable being business owners. They enjoy what they do and they know they need to change their roles in the business eventually. However, most owners don’t resist planning their ownership transitions on a rational basis; they resist Ownership Transition Planning at an emotional level.
This emotional resistance manifests not as rejection of the Ownership Transition Planner’s suggestions, but as passive inaction. Business owners know that Ownership Transition is necessary, but emotionally, they are not prepared for it. So, they ignore the problem until they’re ready emotionally, and by then, it’s often too late to create a plan that helps them transition their business on their terms.
How can business owners confront and overcome emotional roadblocks, especially when most owners would consider themselves experts in rationality?
Rationality Only Goes So Far
As professionals, business owners and advisors are trained to be logical and rational. We used logic to explain what Pete needed to do if he wanted to transition his business on his terms. Pete understood our line of reasoning and what he needed to do, but he did nothing. Pete knew he had to do something, but he didn’t feel he had to do it now.
You might read that last sentence and think, “That sounds like laziness or irresponsibility.” However, based on countless stories from other owners—rarely is this the result of laziness or irresponsibility. They’re the result of neglecting the important concept that transitioning ownership of a business is an emotional event that requires an emotional response from both business owners and their advisors.
Dealing With Emotion Is Necessary
In “Switch: How to Change Things When Change Is Hard”, Chip and Dan Heath noted, “. . .the core of the matter is always about changing the behavior of people, and behavior change happens in highly successful situations mostly by speaking to people’s feelings.”
It’s common for business owners and advisors to disregard emotion when making business-ownership transition decisions, because most of us are either uncomfortable or inexperienced in handling the emotional aspects of such decisions. It is important for advisors to realize that, for owners, this is not a simple, logical business decision. It is one of the most emotional decisions business owners will make in their lives. It’s also one of the most important financial decisions that they will make. That’s why speaking to emotion is not only valid but also necessary for a successful business ownership transition.
Speaking to Emotion in a Business Context
So how did we deal with this issue in Pete’s case?
First, rather than try to convince Pete of the need to change, we let Pete convince himself that he needed to change his role. We asked Pete to complete a short assessment that identified his ownership transition goals and objectives, and pinpointed the specific areas of his business that he felt needed improvement.
For example, Pete answered “No” to the following:
Buyers look for and pay well for companies with motivated and long-standing key employees. Unless key employees are able to run the business without the owner, the company is neither sustainable nor salable to a buyer, employees, or the owner’s children. Can your management team run your company in your absence?
Asking owners to assess their businesses appeals to both their rationality and their emotions. In completing this short assessment, Pete concluded that his business would collapse without him at the helm.
“This business would not exist without me,” Pete said. “I can never leave.”
“And is that OK with you?” We asked.
“No,” he replied. “But what can I do?”
We then described Ownership Transition as both a process to transition his business and a means of moving his business forward. We explained to Pete how Ownership Transition planning could help him create transferable value that would allow him to reach his personal financial goals and ensure the business would continue to flourish without him. This appealed to Pete.
We explained that Ownership Transition planning and building value would take years. During those years, Pete could change his role and focus his efforts on areas of the business that would most benefit him and his company. We showed Pete that planning did not mean transferring ownership before he was ready, financially or emotionally. Working toward a transition of ownership on his terms also appealed to Pete.
Once Pete understood that every Ownership Transition action would be based on his goals, aspirations, and concerns—both financial and personal—he was willing to trust the process and us.
Appealing to both minds and hearts is essential when constructing and executing an Ownership Transition Plan.