- November 6, 2014
- Posted by: Scott Yoder
- Category: Advisory Services, Uncategorized
Business owners who are leaning towards or counting on the next generation to take over know they should create a succession plan, but most postpone or shy away from doing so. The risk of not establishing a formal succession plan is similar to when you purchase an auto insurance policy. You secure it before you drive your new car on the freeway, don’t you? If you wait too long, the price could be very high.
One potential and logical reason this is occurring is a common misconception about what succession planning really is.
Here are a few things succession planning is not:
- A signal that the business is ailing. In fact, a healthy succession plan announces to the world that the business intends to be around for the long haul.
- Restricting to future development. A strong succession plan is dynamic, changing with the economy and evolving with unfolding circumstances.
- A method of pushing leadership out. It is instead a strategic plan for the family and leadership to realize its ultimate goals.
Statistics show us that most businesses don’t stay within the family for multiple generations as most families are unable to maintain the business after the owner exits. This is often due to the lack of effective succession planning. Many business owners who think they have a succession plan actually only have a vague outline of their intent.
Here are some of the ways forward-thinking owners prepare for the future of their businesses:
Create and share your vision.
The astute business owner defines goals and commits them to paper, creating a formal mission statement. Your goals should not end with the establishment of the business, but with the vision of passing along a successful operation to a successor.
If you are to have the acceptance and support of family members and employees throughout the life of the business, you will need to share this vision with them regularly. They need to know where the company is going in order to drive it to greater success.
Analyze future family involvement.
Family involvement with the business will change over time and succession planning must change with it. When the business is young, you must prepare for the possibility of something happening to you before you intend to step aside. In this case, the wisest plan may be a plan for divestment.
Determine and engage the appropriate successor.
This may be a family member, trusted staff members or a team of professional trustees to make management decisions. Whether the successor is a family member or an executive hired to run the company, the family must support the decision. If a family member is to be the successor, they must be committed to the plan in order to receive the grooming and training needed for success.
Succession planning must grant potential successor the opportunity to obtain the education and experience necessary to run the company effectively. The plan may grant temporary control to an interim leader, internal or external, who will step aside at the appropriate time. This plan should be formal and legally binding on all key participants.
Assess the decision.
Is the chosen successor capable of performing the necessary functions to ensure the health of the business? Sometimes, even with commitment and dedication, the successor simply does not have the combined skills, talent, and passion to fulfill the position. This can become apparent while the designated successor works in an apprenticeship capacity. While the decision that the person is not an appropriate choice may still be painful, it is better to discover it early in the process and before turning over the reins of the business. Hiring an external candidate may be the best choice at this juncture.
Succession planning at its best reduces the risks a company faces when it loses its leader. One way to minimize risk is with insurance. Many companies buy policies on behalf of key personnel so that in times of distress, the company can benefit from an infusion of cash to cover lost business, operational delays or other negative impacts of such a loss. Cash will allow the company to hire outside assistance if necessary. Insurance benefits to support the family in times of crisis mean that the business can continue to function normally without a financial drain.
While the leader may change, the full authority of leadership may not transfer directly to the successor. Succession planning may disseminate authority and the ability to make strategic decisions in multiple directions. Long-range planning may remain in the purview of a board of family members while an executive they hire manages daily operations.
Have an alternative or conditional exit strategy.
No matter how detailed the plan, situations may dictate changes. The owner should always maintain an exit strategy that could divest the entire family quickly. With the cash rich companies looking for growth opportunities, the trillion dollar overhang of private equity firms, and the global marketplace, families sometimes come across the deal they simply cannot afford to ignore. Before accepting such an offer, a professional financial team should evaluate the business and your options to help you navigate such a decision.
Realizing that succession planning is enormously complex, an astute business owner will obtain the advice of experts to help navigate the intricacies of the process. You will want to establish the plan and create the necessary documents to ensure that a successor implements the plan as you exit your management role. Engaging experts in wealth management, accounting, tax, insurance and legal will preserve your interests. The process is ongoing, must continuously adapt to your evolving goals and the business needs and the best time to start is now.