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Succession Planning: Part 3 – Hiring External Management

March 10, 2016

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While not uncommon, hiring external management (or developing a successor from within) is not the preferred succession plan option for many business owners. If there is no successor within the family, most business owners prefer to have a clean break from the business from an emotional point of view. With that said, this option can be a very viable and profitable option in the right situation.


Retiring business owners that rely on others to manage the business may fall into two categories:

  1. The potential proceeds from a sale are not enough to pay for retirement, so the owner is relying on the continued cash flow from the business.
  2. The owner does not have any immediate cash needs, and the business is generating significant cash flows with little/no effort on the part of the owner.

If you are lucky enough to fall into the latter category, then this is a great place to be. Even after paying your management team, you are collecting steady dividend cheques without disrupting your retirement plans. You have effectively turned your business into a pension plan, with the additional benefit that you will still be able to sell the business at some point down the road.

However, if you fall into the former category, your financial prospects in retirement may not be so solid. This should not necessarily stop your retirement plans, but you will need to carefully monitor your financial situation.

Although personal financial situations of the owners in the above categories are very different, the characteristics of a business that make this a successful strategy are the same:

  • Strong, experienced management team.
  • Customer relationships developed through the business, not through the owner.
  • Strong internal controls and systems to allow the owner to take a hands-off approach.
  • Profitable operations that can pay for strong management.

In order for this strategy to work, you have to surround yourself with strong management and be willing to give up day-to-day control. Take the time to train and mentor your successor, transition your knowledge and delegate responsibility. Developing trust that your successor will get the job done takes a long time, so you need to start this process well in advance of retirement.

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