Catch Phrase #5:  Succession and continuity plans? I’ll worry about that when I need to.

 CFO’s Response: Then it may be too late.

 While catch phrases always contain an element of truth; using them as a justification for a business decision can sink a company. Catch Phrases and the CFO’s Responses are usually based on the different motives and personalities of the players involved. Avoiding the “sound bites”, understanding the underlying motivations and fears of each member of the team always leads to better outcomes.

Thinking about succession and continuity planning for their business can be as emotional as pre-planning their own funeral arrangements for some owners.  Yet, when well thought out and put in place before they are needed they can eliminate confusion, make the transition easier for those remaining and can ensure that the founder’s wishes and company values will continue on after their exiting the business.

Once a company reaches a certain size, planning is a necessity but companies with only the owner as the sole employee can also benefit. The stakeholders will generally fall into one of four groups – employees, the senior management team, other company owners/partners and heirs of the exiting owner.  Any plan needs to address both financial continuity and operational continuity.  Succession and continuity plans, or the potential for chaos, are usually triggered when the there is a sudden death or incapacity of the owner, desire to retire and close the business or an unexpected offer arrives to purchase the business.

  • In a very small business with few or no employees the owner may be under the belief that their exit will be the end of the business and therefore no planning is needed. However, in the case of a sudden death or incapacity someone will need the written authority to wind the business down and disperse any remaining assets to the heirs. Additionally, there may be intangible assets of value such as customer lists, patents, exclusive licenses, etc. that if monetized would provide additional funds to the heirs. These may not be readily apparent to an heir not familiar with the business. Having a written plan, executed power of attorney and periodic discussions with the designated individual can eliminate many problems.
  • In small and mid-sized companies succession and continuity planning is more complicated and needs to be more formalized with the advice of a team of experts including lawyers, CPA’s, certified financial planners and insurance experts. As important as the above is, implementing the operational continuity through succession selection, ongoing objective evaluation and mentoring can be even more important.

For any transition to be smooth and for the owner to obtain the greatest financial benefit from exiting the company the stakeholders’ concerns and interests need to be considered. If the change is occurring due to a pending sale of the business the new owners will carefully and objectively evaluate the management team and especially the appointed successor.

  • The management team will need to be convinced that the successor has the skills and talent to lead the company forward upon exit of the founder. They typically are the most highly motivated group and will leave the company for greener pastures if they do not have confidence in the successor. Members of the team who have relied on their personal relationship with the founder rather than their talents will be especially anxious and vulnerable.
  • The other employees will be anxious to know their jobs are secure and the company will continue on. They are looking for a quick fill of the leadership void.
  • The other investors and heirs are more motivated in either a quick and fair monetization of their investment or an orderly transition and minimal interruption in operations and returns on their investment. In the case of a surviving spouse who may have suddenly lost the household income, fear may set in and they are looking for confidence of financial security.

In addition to the legal documents, buy-sell agreements, officer life insurance policies, etc. a smooth transition requires the following:

  • A vetted successor who has been “field tested” and mentored.
  • A cohesive senior management team with confidence in the successor to lead the organization.
  • Clear and rapid communications to all the stakeholders which instills confidence and stability and which addresses hidden fears.
  • Execution of daily operations in a professional yet sympathetic way; especially in the case of a sudden death of the owner.
  • In the case of a business sale, communications of a compelling reason for the employees to stay and feel loyalty to a new owner and to feel appreciated and rewarded by the previous owner for their work. They must be excited about their future and harbor no bitterness or sense of betrayal that they were “sold out”.

I’ll Leave You With This….

  • Most people are poor judges of their own mortality. Every person will face incapacity or death at some point and its timing is always unexpected and usually at the worst possible time.
  • Most businesses don’t make it past the second or third generation. Leaving a financial legacy to your family may require a hard decision to leave the operational continuity of your business to a non-family member.
  • An offer to purchase your business at a good price probably won’t occur if you are the business. The business must be more than the owner.

If you could use some assistance with succession and continuity planning please feel free to contact me at Integrated Financial Insights, LLC (IFI).

Stephen Barczykowski

(302) 299-6339