3 Steps Business Owners Should Take Prior to Succession Planning

3STEPS BUSINESS OWNERS SHOULD TAKE PRIOR TO SUCCESSION PLANNING

BY MARK LEYDEN, CLU®, CEO & FOUNDER, MARK LEYDEN & ASSOCIATE

This is the second in a series of four articles discussing considerations around succession and continuity planning for family businesses leading to how life insurance strategies are utilized to achieve many of the goals for such planning. This article discusses the first 3 steps a business owner should undertake when beginning the process.

Many business owners today simply do not adequately plan their succession. Reasons for procrastination vary and include not wanting to leave or let go, not wishing to face their own mortality and an apprehension about creating family disharmony with tough discussions and decisions. In effect, most justifications for not planning an exit are emotional, and a business owner must set aside emotion and plan strategically.

“The owner must have a clear vision of where they are going and how they are going to get there,” says Mike Hutson, CPA, CEPA, the Founder of Edge Business Strategies in Indianapolis and a Professional EOS Implementor. Hutson routinely works with family-owned businesses to help them align operations to reach defined goals. “There are two components in any vision for the future – a business part and a family and personal piece. The owner must decide what they want to get out of the business for themselves and consider how this impacts the future of the business, which may include other family members.” Check out Mark’s previous article: Create a Formal Business Succession Plan in 7 Steps

DEFINE THE VISION OF THE FUTURE OF THE COMPANY AND AN OWNER’S INVOLVEMENT

The process must begin with the owner having an honest conversation with themselves. How long does the owner want to stay in the business, either running it or in some other capacity? By answering this question, the owner can first consider their own needs and how long the business might satisfy those needs – financially and otherwise — as the first building block in planning. A family business owner must honestly and accurately answer these four questions to set the rest of the foundation for a succession plan:

4 Should the owner keep the business or sell it? office of Mayer Brown, LLP. “Many business owners are 4 If the business is to remain within a family, focused solely upon growing their business and they who will lead it? need to take steps to make sure the business will thrive 4 Will the selection of a new leader create past their involvement. Selecting the next generation interpersonal ill will and bitterness? of leadership is a critical element of this process.” 4 If the business is to be sold, will that happen in the In a situation where the succession plan calls for an near future or in the long term? eventual sale, identifying a successor can mean hiring A family business owner does not have to consider the a future potential buyer and grooming them just as path set by answering these questions to be inflexible. would be done for a family member. An outsider may For instance, choosing to keep the business within the also be chosen as the successor in situations where family does not mean selecting a the business will remain within specific heir. It may mean choosing “Many business the family but there are no family more than one and, through a development program, being owners are focused members interested or qualified to operate the company. able to eventually make the solely upon growing For some family businesses, there selection. Also, choosing the family their business and they are easily determined successors succession path does not mean the business could not be sold need to take steps to from within the family and the process for transition is clear. In someday if conditions warranted. make sure the business many instances, though, there Although there is flexibility in will thrive past their may be a need to ‘wait-and-see’, carrying out the succession plan, especially where members of the there are elements that cannot involvement. ...” next generation are still in school wait. If the business is to be sold, or have other careers and have there are vastly different goals to plan for depending not yet decided whether or not to join the business. on whether the sale is in the near future or not. Selling “I find that the children of owners who have first the business sooner rather than later calls for shortworked elsewhere after college for at least a few years term actions which would quickly enhance the value of and gain experience outside of the family business the business. Conversely, if the sale of the business is make the best successors,” notes Luther. “In addition to off in the future, the current operating strategy should the obvious advantages of learning skills in a different at least preserve shareholder value if not increase it. environment, there are subjective benefits to not

IDENTIFY SUCCESSORS

Unless the owner has chosen to sell the family business in the short-term, the next step is to identify one or more successors. “The earlier the process for choosing a successor is started, the better the outcome,” says Dan Luther, an attorney, and partner with the Chicago joining the company right away such as the other employees in the family business having more respect for a son or daughter who appears to have earned their place in the company instead of just being dropped in.” Some businesses find themselves in the difficult position of where a family member who believes they

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should be the successor is not the right fit. This usually

means a difficult conversation must take place. Luther

finds these discussions do not happen as often as they

should. “Who wants to tell their kid that they are not

cutting the mustard and someone else is going to fill the

role?” Conversely, those parents who have a child who

is a clear successor are happy to have the succession

conversation.

Before making any decisions, potential successors should be objectively evaluated on these skills: 4 Competence and credibility to make strong, successful decisions 4 Team-building and coaching skills to support ongoing learning 4 Self-direction and willingness to take direction for optimal goal achievement competitiveness in the marketplace demands change communicating the plan and grooming these future leaders should begin immediately.

PLANNING FOR CONTINGENCIES

Family business owners will attribute some of their success to being prepared for unplanned events as opposed to simply being lucky. This third step in the family business succession planning process protects businesses from unexpected catastrophic events. Business owners can implement strategic planning for the unexpected. The degree or level of contingency planning is the amount of risk exposure an owner is willing to accept should the unexpected occur. Perhaps the greatest risk to most family businesses is that the institutional knowledge of the company is held solely by the owner. This is problematic, especially when an unexpected disaster includes the owner. While many contingencies can be mitigated with the purchase of financial products and life insurance, the details of how to handle contingencies should be recorded as formalized processes and procedures. Identified successors as well as family shareholders should be familiar with these practices as well

Perhaps the greatest risk to most family businesses is that the institutional knowledge of the company is held solely by the owner.

as know their location. Edge Business Strategies’ Hutson notes that most family businesses are not transferable or, at least not for anything near the value the owner has in mind. “The success of a lot of closely-held businesses are a result of the leadership and knowledge of one person, the owner, and this concentrated risk

4 4

4

4

Shared vision for the future viability of the company

Integrity and courage to build trust and ensure

Flexibility to change direction and plans as industry

Once successors have been identified, the process of

significantly impairs market value.” In these situations, it is critical that the business take on a life of its own away from the owner by identifying what changes are needed to maintain successful operations in the absence of the owner.

ABOUT THE AUTHOR Mark Leyden, CLU® is the CEO and founder of Mark Leyden & Associates, an Indianapolis-based firm specializing in assisting businesses and families in the acquisition and management of life insurance assets. He specializes in assisting business owners and families, including some members of the Forbes 400, in design and funding of wealth transfer and business succession plans. This is accomplished by working closely with clients and their advisors. The objectives commonly achieved include tax-efficient wealth transfer, business succession, asset protection, and management team retention plans. Subscribe to our AEM newsletters for more expert perspectives.