By: Patrick Ungashick
Ask a room full of business owners if they need a successor CEO on their team as part of their exit planning, and usually you will hear: “Yes,” “No,” “It Depends,” and “Maybe.” Surprisingly, each of these seemingly contradictory answers can be correct, depending on the business owner’s exit goals and situation. Hiring and grooming a future CEO requires a major effort, and CEO-caliber leaders do not grow on trees. Therefore, it’s important to know if you need a successor CEO to achieve your exit goals because getting this wrong can derail your exit success. Here’s how to tell:
First, you must know your exit strategy. We recognize that there are four distinct exit strategies:
- Pass the business to family
- Sell to an outside buyer
- Sell to an inside buyer (one or more employees)
- Planned liquidation
Determining your likely exit strategy gets you three-fourths of the way toward answering if you need a backup CEO. If your exit strategy is the first option—passing the business to family—then you must have a capable successor in position to achieve a successful exit. Without this, the company likely does not survive your exit. The same necessity exists if you intend to sell your business to an inside buyer, which is the third exit strategy from the list above. Without quality successor CEO leadership, selling to an inside buyer also will likely fail or never happen.
If your exit strategy is the fourth option, planned liquidation, then no need for a backup CEO exists. Under this strategy, you will wind down operations upon your exit.
Of the three exit strategies reviewed so far, two of them produce a “yes” answer to the question of needing a future CEO, and one leads to a “no” answer. That leaves “it depends” and “maybe” as the remaining answers, along with one final exit strategy to consider—selling to an outside buyer. If this is your exit strategy, then “maybe” you need a backup CEO, “depending” on your situation and goals.
Before proceeding, it helps to review the two types of outside buyers: strategic and financial. Strategic buyers are other operating companies that are either competitors or in a business that is sufficiently closely related to yours, that potential synergies exist. Financial buyers are not operating companies, but rather are investment firms such as private equity groups (PEGs) or family offices seeking to purchase companies for their investment portfolio.
Here’s why this matters. If you intend to sell your company to an outside buyer, somebody has to run the business after the sale. Strategic buyers might have quality leaders on their existing leadership teams they can deploy into your company after acquiring it. Given this, it might not be necessary to have a backup successor CEO on your team to sell your company to a strategic buyer.
If you intend to sell your company to an outside buyer, somebody has to run the business after the sale. Strategic buyers might have quality leaders on their existing leadership teams they can deploy into your company after acquiring it.
In contrast, financial buyers typically don’t have leadership teams available to take over running your company. Whether you need a successor CEO or not, depends on your exit goals, when selling to a financial buyer. If your goals include a desire to quickly transition out of the company to pursue other interests or retire after the sale, you will need a successor CEO on the team. Alternatively, if you intend to continue with the company for at least several years after the sale, then selling to a financial buyer will not require a backup CEO because you will remain involved.
Selling to an outside buyer is the most common exit strategy. (Our research indicates about 70% of business owners intend to exit in this manner.) If you need a backup CEO will depend on who buys your business, and your exit goals. Having said this, keep in mind that few things add value to a company like having high-quality leaders. When selling to an outside buyer, even in situations where a successor CEO is not a full necessity, you still can benefit from having high caliber leaders on your team that your buyer can employ after the sale.
Business owners need to define their exit plans and goals, years before the desired exit, because finding, hiring, and training a successor CEO usually takes several years to accomplish. (Plus, there’s no guarantee you get the right hire on the first time.) Owners who get this question wrong often find themselves unable to achieve their exit goals, including working longer than intended. At NAVIX, our clients know their exit goals and are building leadership teams capable of achieving those goals. Contact us to schedule a free consultation to review our twenty-five step 'Exit Readiness Scorecard™' to measure how prepared you and your company are for the future exit.