Here’s a question every business owner must answer: What happens next?
Whether your goal is to transition internally or sell externally, perpetuation planning—or succession planning—is the cornerstone of a successful future for your business and yourself.
If you don’t have a succession plan—or if your plan is incomplete—you’re not alone. Many business owners delay these decisions, often at great cost. But time and inaction can both pose significant risks. Let’s explore how to chart your course with clarity and decisiveness.
Why Succession Planning Is Critical
A business transition isn’t a matter of if—it’s a matter of when. The decisions you make today will impact not only your company’s long-term value and stability but also your personal legacy and financial future.
Without a plan, you risk:
- Diminished value: The absence of a clear transition strategy can negatively impact valuation and overall attractiveness. In fact, Harvard Business Review estimates that better succession planning could increase annual company valuations and investor returns by 20-25%.1
- Lost opportunities: Prospective buyers or investors may lose interest if your business lacks leadership continuity or growth potential.
- Family and partnership disputes: Unclear or incomplete succession plans often create friction among stakeholders, including family members and business partners.
Succession planning helps you avoid these pitfalls, preserve your equity and ensure your business continues to thrive. It’s also not just about planning—it’s about creating options for the future.
Charting the Course: Pathways to Succession
Each path you consider not only affects who will lead the company but also determines its capacity to grow, adapt and thrive in a competitive market. The right path depends on your goals, values and vision.
While other strategies may be available to you, here are three paths owners might consider:
1. Internal Succession
Transferring ownership to family members, key employees, or both, is a common choice for family and small business owners.
This approach often prioritizes the preservation of culture and legacy, but it can significantly limit the business’s ability to scale if the transfer happens with an at-all-costs mindset.
Key considerations:
- Timeframe: Internal transitions can take up to 10-15 years to complete. A phased approach, where ownership transfers gradually, provides successors time to grow into leadership roles while minimizing disruption.
- Stock transfer strategy: Will you gift the stock, sell it or use a hybrid approach? Each option has significant tax and financial implications.
- Leadership readiness: Are your successors prepared to take the reins? Mentorship and leadership training are critical to ensure that continuity doesn’t come at the expense of stability.
- Financing the transition: Can successors fund the buyout, or will you need to structure payments over time? Financing internally poses a greater risk, and limited internal financial resources can impact growth potential.
While internal perpetuation often supports the goals of smaller, family businesses, it requires a deliberate strategy to avoid stagnation and ensure the business remains competitive over time.
2. Strategic Buyer
For owners seeking to monetize their equity through a 100% sale, an external sale with a strategic buyer can offer a path to potentially unlock significant value. Strategic buyers are typically larger companies aiming to expand their market share, geographic presence or product offerings through acquisition.
This path often provides access to institutional-level resources and, of course, additional capital, making it an ideal option for scaling beyond local markets. However, a well-organized transaction can take 4–6 months to execute, often followed by a 2–4-year earnout period. Starting the process years before your planned retirement is critical to help maximize value and ensure a smooth transition.
Key steps for preparation:
- Take steps to prioritize organic growth and operational efficiency to showcase profitability and resilience.
- Build a scalable structure that appeals to buyers seeking growth opportunities.
- Mitigate risks such as client concentration or key-person dependencies that could lower valuation or deter interest.
While an external sale can deliver substantial financial upside, it also means ceding some control. The buyer’s vision and objectives will shape the future direction of the business, so ensuring fit and alignment is key.
3. Scaling with Institutional Capital
If you’re aiming to grow your brokerage rather than exit, partnering with institutional investors—also known as financial buyers—can be a powerful strategy. Financial buyers are investors such as private equity firms or family offices who view your business as an attractive investment opportunity. This arrangement can involve selling 30% to 70% of the business, on average. By securing capital from private equity or larger firms, you can scale your operations, expand your market presence and pursue more ambitious growth goals.
This approach opens the door to significant scaling opportunities, but it comes with trade-offs. Institutional investors often require partial ownership, leading to some dilution of control, although they are not typically involved in running the business. As with an external sale, cultural alignment and fit with the partner is crucial.
Key considerations:
- Ownership dilution: How much equity are you willing to relinquish in exchange for growth capital?
- Alignment and fit: Do the values and vision of your institutional partner align with your own? Do you want to work with them?
This approach allows you to grow while staying involved in the business, but it’s not for everyone. Owners must carefully evaluate how this path aligns with their personal and professional goals.
Navigating Family Dynamics in Succession Planning
Family-owned businesses face unique challenges when it comes to succession planning. Yet, a majority of them don’t have a robust, documented and communicated succession plan in place.2 This widespread lack of preparation can result in missed opportunities, unresolved disputes and unexpected roadblocks during ownership transitions.
A common dynamic involves parents transitioning ownership to children working in the business. However, even in these cases, the process is rarely straightforward.
Key tensions can include
- Role transitions
- Equity allocation
- Differing goals and vision
Consider a scenario where an 85-year-old founder plans to transition the business to their 60-year-old children. The challenge? The ‘children’ are nearing retirement themselves. Misalignments like this are not uncommon and punctuate the need for open communication, proactive strategic planning and, in many cases, third-party mediation to resolve.
Resolving Partnership Conflicts
In many instances, succession planning decisions stem from partnership conflicts. Common issues that may lead to a brokerage sale include:
- Disparities in effort or contribution
- Disputes over equity or ownership stakes
- Misalignment on exit timing or strategy
When challenges like these arise and aren’t dealt with, it can lead to material value destruction.
Take Charge of Your Future
Succession planning is more than just a planning exercise—it’s your opportunity to secure your legacy, protect your employees and position your business for long-term success. The sooner you plan, the greater the potential of your options and outcomes.
MarshBerry specializes in guiding firm owners like you through the complexities of succession planning, all the way through deals and transitions. Whatever your situation and priorities, MarshBerry’s team provides tailored strategies designed to help you maximize value, minimize risk and achieve your goals.
If you want to know more on this topic, watch MarshBerry’s FocalPoint webinar, “Planning for the Future: Strategic Succession for Insurance Brokerage Firms,” which will be released soon.
