Next-Gen Leadership & M&A: Why G2 Matters

In this solo episode of the DealQuest Podcast, I’m diving into an essential yet often overlooked aspect of mergers and acquisitions: succession planning. Whether it’s transitioning from a G2 to a G3 generation or identifying key players to step into leadership, the presence (or absence) of a strong successor can significantly impact deal structure, valuation, and even the ability to sell a business at all.

Many business owners assume they’ll be able to find an external buyer when the time comes, but not every business is easily monetized. Internal succession—when viable—can offer a compelling alternative, allowing for continuity, smoother transitions, and often more favorable deal terms. But what happens when there’s no one in line to take over? How do businesses prepare for succession in a way that strengthens, rather than weakens, their position?

I’ll break down key considerations for business owners navigating these transitions and what it means for long-term exit strategies. Tune in for insights on planning for the future!

SUCCESSORS CAN STRENGTHEN OR COMPLICATE M&A DEALS

A strong next-generation leadership team can boost a company’s value, but it also presents challenges. If key employees are essential to operations but unwilling to take ownership, it creates uncertainty for buyers.

Ideally, a business should function without the owner, reassuring buyers of stability. Even if the owner remains involved, a capable G2 leadership team adds value.

However, in industries like professional services or tech, employees who control client relationships or specialized knowledge may not want ownership responsibilities. If buyers see the business as too dependent on these individuals, it can lower valuation or jeopardize the deal.

To prevent this, business owners should plan ahead with a clear succession strategy—whether through internal ownership transitions or retention plans—to ensure long-term stability.

ALIGN G2 LEADERSHIP STRATEGY WITH BUYER EXPECTATIONS

The role of a next-generation leadership team (G2) in an acquisition depends largely on the type of buyer and the nature of the business. If a buyer is acquiring a company mainly for its client list, product, or market position, they may not prioritize retaining G2 leaders beyond the transition period. For example, if a large company buys a smaller competitor to gain market share, they might already have their own infrastructure and talent, making G2 leaders ss crucial.

On the other hand, in businesses where client relationships are deeply tied to individuals—such as financial services, legal, and accounting—G2 leaders can be essential. Losing these key employees could mean losing customers, making the deal less attractive to buyers. This is especially relevant in industries like wealth management, where clients often follow their advisor rather than staying with the firm.

CLIENT-DEPENDENT BUSINESSES FACE UNIQUE SUCCESSION CHALLENGES

In service-based industries where trust and relationships drive business, losing key employees can directly impact revenue. If a firm is highly dependent on G2 leaders who maintain critical client relationships, potential buyers will assess whether these individuals will stay post-acquisition. If they choose to leave, it could weaken the business’s value and disrupt operations.

Sellers in these industries must proactively address this risk. Ensuring that client relationships are tied to the business rather than individuals—through strong branding, contractual agreements, or incentive structures—can make the company more attractive to buyers. Business owners should also plan retention strategies for G2 leaders, such as financial incentives or career growth opportunities, to increase stability during and after the sale.

G2 LEADERSHIP CAN INCREASE BUSINESS VALUE AND BUYER INTEREST

Having a next-generation leadership team (G2) with established client relationships makes a business more attractive to buyers and can significantly increase its valuation. When key employees manage their own book of business or maintain long-term client relationships originally built by the founders, buyers see them as essential for continuity.

This stability reduces the risk of client loss after an acquisition, which is why buyers often make it a condition of the deal that G2 leaders remain onboard. In many cases, retaining G2 leaders not only reassures buyers but also increases the purchase price. For example, if a founder sells their business to a larger company and plans to phase out over a few years, having committed G2 leaders ensures a smooth transition.
Additionally, many deals include earn-out provisions or performance-based payments—meaning sellers only receive full compensation if the business maintains or grows its revenue post-sale. Keeping G2 leaders engaged boosts the likelihood of meeting these financial targets, making the deal more profitable for the seller.

A STRONG G2 TEAM EXPANDS EXIT OPTIONS

Beyond increasing valuation, a capable G2 team also widens the pool of potential buyers. If a company lacks successors and the owner plans to leave, buyers must have the internal resources to absorb client relationships and business operations. Without a G2 team in place, some buyers may not even consider acquiring the business because they lack the capacity to replace the founder’s role.

However, if a company has strong G2 leaders, it opens up more exit possibilities. Owners can consider an internal succession plan—selling the business to their leadership team instead of an outside buyer. Alternatively, external buyers who lack their own talent pipeline may find the business appealing since G2 leaders can continue running operations. This flexibility can lead to better deal structures, more competitive offers, and an overall smoother transition.

LACK OF EQUITY FOR G2 LEADERS CAN DERAIL DEALS

If key Generation 2 (G2) leaders—those who hold client relationships and contribute significantly to business success—are not given equity, it can create serious challenges during a sale. While they may receive competitive salaries, bonuses, or even profit-sharing, they do not benefit from the capital gains treatment that true equity owners receive when the business is sold. This can lead to dissatisfaction and resistance from G2 leaders, especially if they assumed they would eventually take over the company.

If G2 leaders feel undervalued or excluded from the financial upside of a sale, they may refuse to stay on with the acquiring company. This resistance can jeopardize the deal, as buyers often require key personnel to remain onboard for business continuity. Owners should proactively address this issue by considering equity structures, long-term incentives, or clear succession planning to align G2 leaders’ interests with a successful exit.

G2 LEADERS' WILLINGNESS TO STAY IMPACTS DEAL SUCCESS

The willingness of G2 leaders to remain post-acquisition is critical to the success of the deal. Many G2 employees prefer an entrepreneurial environment and may resist transitioning into a larger corporate structure. If they were expecting to take over the company or have greater control in the future, the decision to sell can feel like a betrayal—especially if there were prior discussions about succession.

From the buyer’s perspective, the retention of G2 leaders is often a key factor in valuation and deal structure. If G2 leaders decide to leave, it can introduce significant risk, as client relationships may not transfer smoothly. Sellers should engage in open, early conversations with G2 leaders, offer retention incentives, and ensure they feel valued in the transition process to avoid deal disruptions.


G2 LEADERS HAVE SIGNIFICANT LEVERAGE IN BUSINESS SALES

When key Generation 2 (G2) leaders control a significant portion of client relationships, they hold substantial leverage in business transactions. If they are not properly incentivized or equitized, they may choose to leave, potentially taking clients with them—whether through active solicitation or passive client attrition. This can significantly impact the value of the company being sold.

Business owners must recognize this leverage early and develop strategies to retain key employees during a transition. This may include enforceable agreements such as non-competes or non-solicits (which vary by state), as well as financial incentives that align their interests with the success of the deal.

EARLY EQUITY PLANNING CAN REDUCE DEAL DISRUPTIONS

One solution to mitigating G2 dissatisfaction is to grant equity well in advance of a sale. If G2 leaders are given ownership at least a year before a deal, they may be able to benefit from long-term capital gains tax treatment rather than ordinary income taxation. However, this strategy must be carefully planned, as transferring equity in a valuable company without proper compensation can create tax complications and valuation challenges.

Founders should proactively assess whether G2 leaders should be equitized and how to structure this transition in a way that is both legally sound and financially beneficial. Waiting until a deal is imminent to address these concerns can lead to resistance, deal delays, or even failed transactions.

PLAN EARLY TO RETAIN KEY EMPLOYEES DURING A SALE

One of the biggest mistakes business owners make is assuming key employees will stay post-sale if offered a retention bonus or a payout. However, short-term financial incentives may not be enough—especially for younger employees with long careers ahead of them and more attractive opportunities elsewhere.

For example, if a founder in their 60s sells the company and retires, but a key employee in their 30s or 40s is expected to stay under a less favorable compensation structure, they may choose to leave. If their departure impacts client relationships or operations, it can lower the company’s valuation or even cause the deal to fall apart.

The best way to avoid this is to start planning years in advance. Offering key employees equity, stock options, or profit-sharing not only strengthens their commitment but also aligns their interests with the company’s long-term success. This approach can make the business more stable, reassure buyers, and increase the likelihood of a smooth transition.

THOUGHTFUL PLANNING FOR EQUITY AND COMPENSATION IN M&A

Granting equity last-minute can create tax and legal challenges, especially if key employees don’t already have ownership. If a business owner wants to share sale proceeds, they must plan ahead to navigate valuation issues and financial hurdles.

One option is structuring compensation around “personal goodwill,” where a key employee’s client relationships justify allocating part of the purchase price to them. However, not all buyers will agree, and specific legal criteria must be met. Business owners who plan early can explore profit-sharing, phased ownership transitions, or long-term equity models—ensuring smoother deals and avoiding last-minute roadblocks.

A STRONG G2 INCREASES YOUR DEAL OPTIONS AND VALUE

Having a well-developed leadership team gives you more options when structuring a deal, whether it’s an internal succession plan, an external M&A deal, or a higher purchase price with better terms. However, some industries struggle with developing young talent and retaining them long-term.

If your business lacks a strong G2 or even a G3 (third-generation leaders), you may have fewer options and a lower valuation. This is why it’s essential to not only identify and train up-and-coming leaders but also to ensure they are motivated to stay. Working with advisors to plan ahead can help you avoid pitfalls and create a strong foundation for growth—whether or not you ever sell your business.

Tune in to this episode to hear my insights on overcoming limiting beliefs around money, embracing a mindset of abundance, and using strategic, heart-centered marketing to grow a thriving online business.
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Corey Kupfer is an expert strategist, negotiator, and dealmaker. He has more than 35 years of professional deal-making and negotiating experience. Corey is a successful entrepreneur, attorney, consultant, author, and professional speaker. He is deeply passionate about deal-driven growth. He is also the creator and host of the DealQuest Podcast.

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