It's Never too Early to Start a Succession Plan

It’s Never Too Early to Start a Succession Plan

So here’s a topic that all business owners have thought about but few have taken action on: succession planning.  I was reading a study by Wilmington Trust the other day that polled 200 different owners of privately held businesses.  Personally, I’ve yet to meet a business owner who doesn’t agree that succession planning is important to their company and stakeholders.  Yet in this study, 58% of the businesses polled don’t have a succession plan in place!

Successions impact…everything: your family, your legacy, your finances, your employees, your partners, your customers, your stakeholders, and anyone else who touches your company.  My guess is that you want all these pieces intact throughout your transition and after you leave.  Yet most business owners don’t tackle the issue until a) it’s high time to exit, or b) they’re forced to for a reason out of their control.

Why?  Many people start to realize that the emotions involved are heavy and deep.  Your business is probably something that you’ve poured your heart and soul into for a long period of time.  You may have taken significant financial risks that have impacted your family along the way.  The decision making required in succession planning brings up a lot of emotion, and many business owners prefer to kick the can down the road rather than deal with them.

Problem is, there are many situations out of our control that could force a succession at an inconvenient time.  Health problems, car accidents, or even changes in the economy or your industry could easily force your hand.  Rather than rush into a transition unprepared (and in a potential fire sale), you’ll reach a far more desirable outcome when your succession is planned for.  What happens if you get into an accident and come out with diminished mental capacity?  What happens if you have a heart attack & die tomorrow?  What’s the game plan?  Who will step in, and how will your family, employees, customers, and other stakeholders be taken care of?  These are the questions a good succession plan answers.  They’re also the questions that must be made while you’re in a calm, stable, and clear state of mind.



So how do you execute a well thought out, effective succession plan?  The Exit Planning Institute uses a process of “Discover, Prepare, Decide”.  Basically, you want to start by evaluating what you have and what you want – at both the personal and business levels.  On the personal side, what’s your financial situation look like?  What do you have saved & what do you owe?  On the business side, what’s your company worth right now?  A rudimentary valuation (at minimum) is probably needed here, as well as a review of your company’s overall health.

What you want should also be split into personal and business objectives.  Personally, most people want financial security for themselves and their families.  If legacy or college tuition for your grandkids is important to you, these items should be discussed and addressed.  Then, for the business, map out your objectives when transitioning away from your role as equity owner & decision maker.  Common items here are:

  • Long term company viability
  • Continuity & job security for employees
  • Continuity for customers
  • Continuity for the community

If someone else needed to step in tomorrow to run your company, how might these factors influence your decision making?  Listing what you have and what you want will provide useful context.



Once you know what you’re after, you can begin to prepare for it.  Remember the 7 P’s: proper planning and preparation prevents piss poor performance.  Since you & your family’s financial security is likely at the top of your wish list, the best place to start is probably with a personal financial plan.  The idea here is to evaluate what kind of financial resources you’ll need to do the things you want to do in life.  It’s very unlikely that you’ll never experience another recession or bear market, so a good plan should be “stress tested” against unfortunate circumstances.  What happens if the market crashes right after you exit?  Will you still have adequate resources to live comfortably?  When you transition away from your company, what will you need to get from your equity stake to do with a reasonable degree of confidence?

With a personal financial plan in place, you can review the actual mechanics of what a succession would look like – planned or otherwise.  If something unfortunate were to happen to you tomorrow, who would be the best person or group to step in and lead your company?  Given the objectives you listed for a transition, what would be the best course of action?  Does a partner step in and fill your shoes?  Is there an internal candidate who’d be promoted?  Or is the best path a sale to an external entity?

Obviously, the three examples above are extremely different paths.  A sale to a partner is often the least disruptive to the business, but managing workload could be an issue for the partner stepping in.  An internal succession could also be convenient, but may require additional training and mentorship.  Sales to other companies may be an option too, but how does that work if you’re not around to handle things?  Who has the authority to come in and keep the wheels on until a sale is finalized?  Who would you sell to, and how would a deal be negotiated?



Now that you’re starting to understand what an effective succession would look like for you & your family, you can begin ironing out the logistical details.  Do you need a buy/sell agreement?  Does your plan need to be funded with life insurance?  What deal structure will produce the lowest tax liability?  These are the questions that should be answered, and exist alongside a thoughtful plan for execution.  If your successor needs additional training or mentorship, lay out a logical career path.  Avoiding these conversations simply because you enjoy running your business puts the entire operation – and your family – at risk.

As difficult as it is for business owners to discuss their own demise, establishing a succession plan actually helps increase enterprise value.  Knowing how operations would continue in your absence makes your business less reliant on one person, and more attractive to an interested buyer.

If you don’t have anything in place yet, you might want to keep succession planning toward the top of your to-do list.

Posted in Business Ownership, Entrepreneurship, Financial Planning, Succession & Estate Planning and tagged , , , .

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