Internal vs. External Succession: Choosing the Right Exit Path for Michigan Businesses

After running his West Michigan manufacturing company for more than 30 years, one owner put it this way:
“I know I need to hand the business off. I just don’t know who should be waiting for the baton.”

That question—who takes over next—is at the heart of succession planning for Michigan business owners. While every situation is different, most exit paths fall into one of two categories: internal succession or external succession.

Choosing between them is less about right or wrong and more about fit—fit with your financial needs, your people, your timeline, and your vision for what comes next.

Succession Planning in the Michigan Business Landscape

Michigan is home to a large number of closely held and family-owned businesses, particularly in manufacturing, construction, distribution, and professional services. Many of these companies were built by founders who are now approaching retirement age, often with no formal succession plan in place.

At the same time, the market has changed:

• Buyers—especially private equity firms—are more active than ever
• Leadership depth is uneven across industries
• Unexpected events (health, burnout, market shifts) are forcing decisions sooner than expected

In this environment, succession is not a distant concern. It is a strategic one.

Two Primary Exit Paths: Internal vs. External Succession

At its core, succession is a handoff. The question is whether that handoff stays inside the organization or passes to someone from the outside.

What Is Internal Succession?

Internal succession means transferring ownership and leadership to someone already within the business.

Common internal paths include:

• Family succession, where a child or relative takes over
• Management Buyout (MBO), where key employees purchase the business, often over time
• ESOP (Employee Stock Ownership Plan), a structure where employees gradually acquire ownership through a trust

These paths often appeal to owners who value continuity and legacy.

Why Owners Gravitate Toward Internal Succession

Internal succession is frequently driven by emotional and relational factors:

• Loyalty to family or long-term employees
• Desire to preserve culture and identity
• Comfort with familiar leadership
• A gradual transition rather than a clean break

For many owners, internal succession feels like a natural second act.

The Tradeoffs of Internal Succession

Where internal succession tends to work best:

• Strong, proven internal leadership already in place
• Owners willing to transition slowly
• Lower immediate liquidity needs
• High priority placed on continuity

Common challenges:

• Limited access to capital
• Valuation gaps between what the owner needs and what insiders can afford
• Risk that successors are operationally strong but ownership-unready
• Potential family or employee conflict

Internal succession often rewards patience—but it also requires realism.

What Is External Succession?

External succession involves selling the business to a third party outside the organization.

Typical external buyers include:

• Strategic buyers (competitors, suppliers, or customers)
• Private equity firms (investment groups seeking growth and eventual resale)
• Individual buyers or search funds (investors formed to acquire and operate a single business)

This path treats the transition more like a market transaction.

Why Owners Choose External Succession

External succession is usually driven by clarity and certainty:

• Desire for liquidity and financial security
• No viable internal successor
• Opportunity to capitalize on strong market demand
• Preference for a cleaner exit

For many owners, this path provides closure—and optionality.

The Tradeoffs of External Succession

Where external succession tends to work best:

• Strong, transferable cash flow
• Limited owner dependency
• Willingness to let go of control
• Desire to maximize value

Common challenges:

• Cultural change after the sale
• Employee anxiety during transition
• Intense due diligence
• Less control over long-term legacy

External succession often wins financially, but it can feel emotionally harder.

A Simple Comparative Lens

While every situation is unique, a simplified contrast can help frame the decision:

• Internal succession tends to favor: continuity, culture, gradual transition
• External succession tends to favor: liquidity, speed, market-based valuation

Neither path is superior. Each rewards different priorities.

Timing: The Silent Driver of Outcomes

Internal succession typically requires earlier planning—often years—to:

• Develop leaders
• Arrange financing
• Test readiness

External succession is more sensitive to:

• Market conditions
• Industry trends
• Business performance at the time of sale

Waiting too long narrows options on both fronts.

Hybrid Approaches: Keeping the Baton in Motion

Some owners pursue blended strategies:

• Selling a minority stake to private equity (a recapitalization, meaning partial liquidity while staying involved)
• Grooming internal leaders while exploring external interest
• Allowing management to roll over equity alongside an outside buyer

Hybrid paths preserve flexibility and reduce regret.

Common Mistakes Michigan Owners Make

Across both paths, several issues recur:

• Assuming family or employees want—and can afford—to buy
• Overestimating internal readiness
• Waiting until fatigue or crisis forces action
• Treating succession as a single decision instead of a process

Most failed successions are not about bad intentions—they’re about late planning.

The Advisor’s Role: Turning Options Into Decisions

An experienced advisor does more than explain choices.

For example, consider a Michigan manufacturer choosing between an MBO and a private equity sale. An advisor can:

• Model financial outcomes under both scenarios
• Assess leadership readiness objectively
• Identify deal-structure risks (such as earnouts, which tie part of the price to future performance)
• Coordinate tax, legal, and estate considerations

The goal is clarity—before emotions or urgency take over.

Final Thoughts: Succession Is a Handoff, Not a Finish Line

Succession is not the end of the business story; it’s a transition between chapters.

The right exit path is the one that aligns with:

• Your financial needs
• Your people
• Your tolerance for change
• Your vision of what comes next

For Michigan business owners, the key takeaway is this: the earlier you clarify your priorities, the more control you have over the handoff.

To learn more information on the options business owners have, we welcome a conversation to discuss your goals. Contact us here.