By Mark Leyden, CEO & Founder, Mark Leyden & Associate
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,” said Mike Hutson, 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,” Hutson said. “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.”
Define the vision
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:
- Should the owner keep the business or sell it?
- If the business is to remain within a family, who will lead it?
- Will the selection of a new leader create interpersonal ill will and bitterness?
- If the business is to be sold, will that happen in the near future or in the long term?
A family business owner does not have to consider the path set by answering these questions to be inflexible. For instance, choosing to keep the business within the family does not mean selecting a specific heir.
It may mean choosing more than one and, through a development program, being able to eventually make the selection. Also, choosing the family succession path does not mean the business could not be sold someday if conditions warranted.
Although there is flexibility on carrying out the succession plan, there are elements that cannot wait.
If the business is to be sold, there are vastly different goals to plan for depending on whether the sale is in the near future or not. Selling the business sooner rather than later calls for short-term actions which would quickly enhance the value of the business. Conversely, if the sale of the business is in the future, the current operating strategy should at least preserve shareholder value if not increase it.
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,” said Dan Luther, an attorney and partner with the Chicago office of Mayer Brown, LLP.
“Many business owners are focused solely upon growing their business and they need to take steps to make sure the business will thrive past their involvement. Selecting the next generation of leadership is a critical element of this process.”
In a situation where the succession plan calls for an eventual sale, identifying a successor can mean hiring a future potential buyer and grooming them just as would be done for a family member. An outsider may also be chosen as the successor in situations where the business will remain within the family, but there are not family members interested or qualified to operate the company.
For some family businesses, there are easily determined successors from within the family and the process for transition is clear.
In many instances, though, there may be a need to ‘wait-and-see’, especially where members of the next generation are still in school or have other careers and have not yet decided whether or not to join the business.
“I find that the children of owners who have first worked elsewhere after college for at least a few years and gain experience outside of the family business make the best successors,” Luther said.
“In addition to the obvious advantages of learning skills in a different environment, there are subjective benefits to not 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 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?” he said.
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:
- Competence and credibility to make strong, successful decisions.
- Team-building and coaching skills to support ongoing learning.
- Self-direction and willingness to take direction for optimal goal achievement
- Shared vision for future viability of the company.
- Integrity and courage to build trust and ensure competitiveness in the marketplace.
- Flexibility to change direction and plans as industry demands change.
Once successors are identified, the process of communicating the plan and grooming these future leaders should begin immediately.
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 as know their location.
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 significantly impairs market value,” he said.
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.
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 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.