Some Business Succession Planning Thoughts

Coman & Anderson, P.C. provides a variety of legal and consulting services to businesses and their owners. One of our most sought after services is the guidance we provide to clients in their Business Succession Planning, or Exit Planning. In simple terms, Business Succession Planning involves helping our clients identify and articulate clear long-term goals for their businesses, and then helping them develop and execute the strategies to achieve those goals.

Without such a strategy and without proper planning, many business owners can end up with far less value from the disposition of their businesses than they might otherwise have realized. In the worst case scenario, a business simply shuts down after the death or illness of its owner. This results not only in a financial loss for the owner’s family, but also can damage the employees, vendors, and customers that rely on the business for their continued financial vitality. In short, without a good business succession plan, everyone stands to lose.

Initial Considerations

The first step in developing appropriate strategies is to have a focused goal or end result. There are many and varied Business Succession Planning goals that our clients typically mention; here are some common themes:

1. The business owner wants to create a lasting legacy that continues on after he or she is no longer involved with the business.
2. The owner wants to maximize the value of the business for sale either to insiders or to outsiders.
3. The business owner wishes to create an ownership and/or employment opportunity for children or grandchildren.
4. The owner wishes to provide ongoing employment opportunities for the hard working employees of the business after the owner is no longer involved.
5. The business owner wishes to “make a difference” in his or her community (in whatever way the owner defines “community” and “difference”).

Embracing Operational Irrelevance

Depending on the client’s identified goals, different strategies can be utilized. One strategy with broad applicability is adopting a course of behavior which, over time, is designed to reduce - and ultimately sever - the dependence of the business on the active, daily, operational involvement of the owner. We understand that becoming “operationally irrelevant” to the business is counter-intuitive for many business owners. This is especially true for smaller organizations where the owner performs many different, but essential roles.

The reason that operational irrelevance is so important and helpful is that it goes right to the heart of business continuity. If you want your business to survive your absence, you need to position it so that it can operate without you while you are still around to guide its ongoing strategies and operations.

Similarly, operational irrelevance is critical in maximizing value; if you want to sell your business and retire, any new owner will pay a higher price for a business that can predictably continue without the input or involvement of existing ownership. Said another way, if there is a serious risk (or even a certainty) that the business would be negatively impacted by the departure of the current owners, a purchase price for the business will reflect that negative risk.

This problem is a real danger rather than just a theoretical discussion because many business owners feel trapped by the day-to-day demands of their business. Often this is a by-product of the entrepreneur’s all-too-common woe: “no one can, or will, do this as well as me.” But by working toward operational irrelevance, the owners effectively give themselves “promotions” to being and acting like true Chief Executive Officers. The CEO of a properly structured firm has the time to focus on higher level business strategies to maximize opportunities and minimize the risk of loss. This shift in focus frees staff to execute those strategies, and coincidentally makes the business more valuable to a third party purchaser.

Getting the “Right People on the Bus”

In order to achieve operational irrelevance, you need to be able to articulate your key business functions, and either select the right on-board staff or recruit new personnel to fill such positions. Once you have the right people in place, you need to cultivate them, motivate them, and retain them.  While compensation is a core issue, identifying and responding to your personnel’s non-monetary motivations is often as critical to their long term satisfaction and retention.

Various mechanisms exist to encourage long term staff retention.  One such mechanism is a deferred compensation program, sometimes referred to as a “golden handcuff” program.  These arrangements are used to incent high level performance and to encourage long term participation by aligning rewards to key personnel with the long term goals of the owner’s Business Succession Plan.  For example, if a business sale to an outside party is the identified goal, then sharing some percentage of the sales proceeds with key personnel who stay with the company for a reasonable timeframe after the sale may provide motivation to support the successful transition of ownership.  There are many such plans that can be customized to each business’s unique situation.

Business Succession Planning is critical to all of the “stakeholders” in a business – that is, its owners, employees, vendors, customers and the communities in which the business operates. Proper deliberation and thoughtful implementation of such a plan allows everyone to benefit.

For a more detailed and ongoing discussion of these complex issues, please see my blog at: www.businesssuccessionstrategies.com.  Some of my recent blog posts on these and related issues include these topics:

1. Goal Discernment.
2. Operational Irrelevance:  Why Would I Want That?
3. Operational Irrelevance:  Step 1:  Key Business Functions.
4. Operational Irrelevance:  Step 2:  Empowering Your People.
5. Retaining Your Key People – Step 1:  Non-Monetary Motivations.

The topic of Exit Planning and Business Succession Planning is a complex one, and this article just scratches its broad surface.  Different planning considerations come to bear if the exit goal is a sale to an outside third party, or a sale to “insiders” (key employees), or a gifting program to family members.  Each of these avenues has corporate complications, tax nuances, and estate planning implications that should be considered carefully – and early.  At Coman & Anderson, P.C., we pride ourselves ourselves on being able to work with clients to help shape the goals, design the strategy, and oversee its successful implementation.  Feel free to contact me with any questions or if we can be of any assistance.

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