Succession has three routes, and each takes a different amount of time

A business owner who had been referred to us asked to talk one on one, away from the office. He came with a sheet of paper. He had written down his questions because he was afraid he would forget something. I have changed the details so that neither the company nor the parties can be identified.

He came to ask what his options were. He left knowing he had one. He had run the company well for thirty years. Two of the three routes to succession, however, needed more time than he had left. At Capital One Advisers we have such conversations more and more often, and almost all of them start too late.

Owners talk about succession as a decision they will take when the time comes. Each of the three routes, however, has a known length. Bringing a son or daughter into the company from the ground up takes seven to eight years. Building an outside management team takes three to five years, and selling the company about a year and a half. What the owner decides above all is when to start. That date determines how many routes he will be able to choose from.

Children: seven to eight years

Transferring the shares to a child can be done at a notary in a week. Handing over the company takes years, because it is made up of things that cannot be hurried.

The successor has to get to know the company from the inside, in day-to-day work. He usually takes over customer relationships through two or three years of joint meetings in which he answers more and more of the questions himself. The managers remember him as a child and will watch whether he decides on his own or asks his predecessor. He therefore builds his own position slowly. He should make his first serious mistakes while the predecessor can still fix them. The first serious mistake made after the predecessor has left is sometimes the last.

Then there is a condition the family rarely talks about openly. The successor has to want it. Owners assume this without saying so, and the assumption turns out to be wrong more often than conversations at the dinner table would suggest. A child who has spent fifteen years hearing how hard this business is draws his own conclusions. Testing in practice whether he wants it takes a year or two and fits within those eight years. The child is then usually given a separate area of work with a measurable result, preferably under someone other than the parent.

A complication also arises when there is more than one child and only one company. Giving it to two children in equal halves, without settling who decides, creates the arrangement I wrote about in the article on partner splits: two people with equal rights and different plans. Here, one of them cannot be bought out without consequences for the whole family.

Inheritance law adds its own arithmetic. If the owner gives the shares to one child, the other children may claim a forced share (zachowek) after his death. That is a cash payment of at least half the value of the share they would have received under statutory inheritance. A gift to a child is added to the estate for this purpose no matter how many years have passed since it was made. A successor who has taken over the company may therefore, years later, have to pay off his siblings, and the money for this usually has to come out of the company. Tax itself is not an obstacle here, because gifts within the immediate family are exempt once the formalities are completed.

The forced share can be settled during the owner’s lifetime. An owner with assets outside the company can give them to his other children and sign an agreement with them at a notary in which they waive their right to the forced share. When almost all of the family’s wealth is in the company, a family foundation, available in Poland since 2023, can be the solution. The owner contributes his shares to it and names his children as beneficiaries, the people entitled to its benefits. The shares then belong entirely to the foundation, and its statute decides who exercises the shareholder’s rights. Here too, time matters. When the forced share is calculated, the value of the contributed shares stops being added to the estate only ten years after the contribution. The foundation therefore has to be set up well in advance.

Outside management: three to five years

This route looks shorter, and it can be, if the first CEO chosen proves right for the job.

Recruiting a CEO for a mid-sized company takes six months from the decision to the first day at work. Onboarding takes a year. For the first three months the new CEO mainly reads and listens. Then the company has to get through its first difficult quarter under his leadership. Only then does it become clear whether he can take unpopular decisions. It also becomes clear whether the managers accept his leadership day to day. From the start of the search to the first reliable assessment, almost two years go by.

The first choice is sometimes wrong, even after careful recruitment. A manager who ran a division in a corporation very well works in different conditions in an owner-run company. He has no staff and no budget for mistakes, and the owner watches every decision he makes and can reverse it. Some good managers do not cope in such conditions. Parting with the first CEO, recruiting again and onboarding the successor add two to three years, so the whole route stretches to five.

What decides success, though, is the owner’s attitude. A good manager from the market costs a lot and rarely raises profits in the first quarters. The owner sees this cost and is tempted to correct the manager’s moves, because he would have done it faster himself. A CEO whose decisions are constantly second-guessed stops taking responsibility after the third time. Meanwhile the managers learn that they still have to ask the old boss for approval. After two years the company has a new CEO, but in practice the owner is still running it.

This route also brings a benefit owners usually do not plan for. A company with an independent management team attracts private equity funds, which do not have their own managers ready to send in tomorrow. The buyer then does not cut the price for the risk of the owner leaving, and less often makes part of it depend on future results. For a trade buyer with its own managers this matters less, because after an acquisition it often fills the board with its own people. Even so, an independent management team widens the circle of buyers and is often the best preparation of a company for sale.

Sale: about a year and a half

A sale is the shortest route, and that is why it is often the only one available to those who started late.

Preparing the company takes a year. The earnings have to be cleaned of the owner’s private costs and of one-off events, to show the buyer the recurring profit. This work is called normalizing the earnings. In the same period a financial model is built, the issues a due diligence review would uncover are put in order, and the buyers are selected. The investment thesis also has to be written down, meaning the answer to the question of why a particular buyer would pay more for the company than others. The sale process itself takes six months, from the first contact with an investor to closing, provided nothing breaks down along the way. What happens in the preparation phase is described in the articles on adviser fees and on due diligence. One thing matters here. That year cannot be shortened to three months. It can be skipped, but then the seller pays for it with a lower price.

A sale also has an intermediate version for an owner who has no successor but can still work in the company for a few years. He sells a majority stake to a private equity fund and stays on the management board for two or three years. He receives most of the money after a year and a half, and the fund helps him build a management team that will take over after he leaves. The whole exit then takes three and a half to four and a half years, roughly as long as building an outside management team. This version also has a clear drawback. After four or five years the fund will sell the whole company to the next investor, usually together with the former owner’s stake. The owner then receives a second payment for his remaining shares, but the company leaves the family’s hands.

How many routes are left at a given age

These three periods are worth setting against the owner’s age. The thresholds below assume he wants to hand over the company at around seventy. If he plans to step back earlier, for example at sixty-five, each of them moves down accordingly.

An owner who starts planning at fifty-five has all three routes. He also has enough time, if an attempt to hand the company to a child fails, to build an outside management team without haste. At sixty he still has all three. If, however, the attempt with the child fails after a few years, he will not have time for a second CEO recruitment. Between sixty-two and sixty-three, the option of bringing a child into the company from the ground up before seventy closes. At sixty-five only two routes remain: outside management and a sale. If the first CEO does not work out, replacing him will fill all the time left until seventy. At sixty-eight only a sale remains, and the owner usually does not know it, because nobody has done the calculation for him.

These thresholds apply to preparations started from scratch. A child who has worked in the company for ten years and already handles some customers on his own is most of the way along the first route. A company with a strong second tier of managers will build a management team faster, because the new CEO arrives to an independent team. A company with orderly books and contracts needs less time to prepare for a sale. At Capital One Advisers we count these thresholds backward from the date on which the owner wants to stop running the company.

Three tests before choosing a route

How many routes are really open depends on how much the company depends on its owner. Three tests show this.

The first concerns customers. The question is who calls the customer when a problem comes up, and whom the customer calls back. If the owner handles both calls, a quick sale on good terms is out of the question, because personal relationships do not pass to the buyer along with the shares. The buyer will then require the owner to stay in the company for several more years after the transaction. A child or a new CEO needs several full years of joint meetings in such a company to take over the relationships step by step.

The second concerns decisions. What counts is how many decisions in the last quarter were actually taken without the owner. In a company where every important matter goes through one person, the managers carry out instructions and do not learn to decide. A new CEO or successor then first has to build a team of managers, which lengthens every route.

The third concerns absence. The question is what would happen to the company if the owner disappeared for three months, with no phone and no email. The answer shows how much the company is worth without him, and that is exactly what a buyer pays for.

No contract or resolution will remove a company’s dependence on its owner. It can only be reduced step by step. The owner hands more duties to his team and accepts that for the first year they will be done less well. Getting through that year is in practice the hardest part of succession, harder than choosing the route.

When there is less time than the route requires

In many companies nobody has done this work in advance. An owner who has less time left than the chosen route requires then has three options. None is good, and each has a different cost.

He can choose a sale and accept that the preparation will be incomplete, which will show in the terms of the transaction. With shortened preparation the buyer finds loose ends in the due diligence review and uses them to lower the amount agreed at the outset. He is also more willing to hold part of the payment in an escrow account. The seller receives that money only after the agreed period for raising any claims has passed. The buyer often makes a further part depend on the company’s results in the following years.

He can also choose the sale of a majority stake to a private equity fund described above, if he is able to work on the management board for a few more years.

Finally, he can hand over management to someone from inside the company whom he already knows. Such a manager sometimes has less experience than candidates from the market, but he knows the company from the inside and can take over at once. With a short horizon, readiness to act from the first day counts for more than an impressive career history.

The most expensive option is trying to hand the company to a child within a year. It usually ends with the child holding shares but no real position in the company. The managers soon see that nobody is really deciding, and the company pays for it in its first crisis.

Time and the chance of a family company

The hardest choice concerns the first route. Testing in day-to-day work whether a son or daughter really wants to take over the company, and can, takes a year or two. During that time the other options shrink. An owner who spends two years at sixty-three on an attempt with his child and hears a refusal will be left with two routes at sixty-five. He will then have five years until seventy. Any delay in recruiting or replacing a CEO will push his departure beyond that age.

Some owners take this risk knowingly, because they value the chance of keeping the company in the family more than a calm exit from the business. Others, after thirty years of work, prefer to start building an outside management team at once, or to prepare a sale without haste before the passage of time weakens their negotiating position.

Service: M&A advisory on a company sale