In last month’s article, we discussed what succession planning really is. Succession planning is a process that all business owners will ultimately have to deal with. There is no if in the need for succession planning because one thing is sure—you as an owner will one day leave your business in one way or another—whether through retirement, disability or death. There is only when and how you should plan for these eventualities.
A succession plan is the specific planning which must take place in order to insure the survival and continuing success of the business after the departure of the owner—whether through the owner’s retirement, disability, death or after the sale of the company.
Succession planning involves planning for the transition of ownership, management, and control of the business from one generation of people to the next, as well as the particular terms and conditions under which the current owner(s) will leave the business.
The average life expectancy of a privately held business is only 24 years. On average, only 33 percent of businesses survive their founder(s). Only 12 percent of businesses survive the second generation of owner(s). Only 3 percent survive the third generation of owner(s).
In our experience, very few businesses really have a succession plan which sufficiently addresses all conditions under which the owner(s) leaves the business, i.e., retirement, disability, death or upon sale of the company. If you just look at owners of very successful businesses, only about 36 percent of these businesses have a succession plan. Approximately 53 percent of these owners have considered a succession plan, but have not implemented any plan. The remaining 11 percent have never even thought about succession planning.
Assume you are an owner of a successful privately owned company without a succession plan. What are the prerequisites for a successful succession plan?
First and foremost, you must have enough time between the development of your plan and your eventual exit as an owner in order to make mistakes. The biggest mistakes that owners make are lack of planning and picking the wrong management successors.
The only way to overcome these mistakes is to leave enough time in the process to correct them. Ideally, a business owner would begin implementing a succession plan at least 10 years prior to the owner’s expected exit. However, when your planning window is less than five years, the odds of implementing a successful succession plan diminish greatly.
Second, the business must be profitable and successful. Some businesses cannot be transferred to the next generation (or sold to anyone else). They simply do not deserve to live.
The third prerequisite is a qualified team of advisors. No one person knows all the answers. Not you. Not your lawyer. Not your CPA. Not your insurance and investment agent. Succession planning is best done with the right team of advisors who have the right expertise.
Fourth, you need a facilitator who is trained and knowledgeable about not only the succession planning process, but also about methods of building consensus between all the parties and stakeholders who need to “buy in” to whatever plan is developed.
Fifth, you need a good process. One that goes beyond your lawyer saying, “Well, here is the form of a buy-sell agreement that a lot of people use and also, you need to contact your insurance agent so you can get a life insurance policy for the buy-sell agreement.” That is not a process.
Finally, there are certain truths that must be embraced before embarking on the succession planning process. These include:
a. There is usually no one answer to the issues that will arise. The answer depends on many factors, including the goals and personalities of the owner and other key people involved in the business. There is, however, usually an optimum solution and succession plan for each particular business and owner.
b. It does not matter what actually is “fair” in the owner’s mind—just what is perceived to be “fair” by the owners and other stakeholders, and
c. The degree of consensus on a final plan is directly related to the perceived amount of input and meaningful participation by all necessary stakeholders.
Consensus on a succession plan is best obtained when there is an atmosphere that permits sharing of information (especially financial data) and a clear willingness to seek and give input before major decisions are made.
In next month’s article, we will discuss the particulars of a good succession planning process.