Updated: Oct 13, 2020
Over many years in the business we have encountered numerous owners who have made the statement “I have it all figured out” when asked about their succession plan. They begin to describe how they have thoroughly planned and documented how the business succession will work, explaining how they have worked through their wills, trusts, buy/sell agreements, and life insurance. What most owners do not realize is that all the items listed above constitute as business continuity planning and not succession planning. You may be asking yourself, what is the difference?
Business continuity planning is properly transferring the business to the next generation, whereas business succession planning addresses transferring a business through the next generation. The process of achieving business continuity is a simple task generally addressed within your will, trust, and/or buy-sell agreement to transfer your business to your children or partners. However, business succession planning is a more arduous task that addresses both transactional and operational issues. A predicate to succession is operational success. To be clear, business succession planning addresses more operational issues in addition to typical estate planning transactions.
Many owners of family businesses have prepared a succession plan that is completed with their limited scope of understanding. Achieving a successful succession plan requires the willingness and dedication to stay involved in a process that covers the issues such as family communication, exit strategy, key manager retention, and strategic corporate planning. Industry experts say, approximately 33 percent of family businesses succeed from first to second generation and only 10 percent succeed from second to third generation. Many of the failures of family owned businesses is due to the lack of understanding that business succession cannot be properly addressed completely through wills, trusts, and life insurance.
Planning a succession can be a difficult task since often self-esteem is tied to the business. Meaning a genuine succession plan and activation of an exit strategy is understandably difficult as many owners see their business as their “first born” Unless you want to be carried out the door with your boots on, an exit strategy is essential.
It is important that business owners’ step back and give their successors an opportunity to validate their ability, which can make determining the succession plan easier. This is easier said than done, letting the next generation assume the responsibilities of the owner is difficult to do because unfortunately, at 65 or even older, many self-made business owners have concluded that they are just hitting their prime. After many years of sweat and tears sacrificing to build the business, they have finally achieved the personal satisfaction of business success and want to enjoy the fruits of their labor. Never take for granted that you have time to address those matters.
Unfortunately, we have no magic pill that can ease the transition. Our best advice is to persistently remind the senior generation of their stewardship responsibility to reinforce the importance of developing successors who can manage the business. It is also worthwhile to mention that in the absence of verifying that successors are capable; the financial security of family employees is at risk.
Many business owners characteristically are so absorbed by the business that they have failed to develop hobbies and friends. So, the relationships with employees, key managers, vendors, and business colleagues are their world. They are often seen as workaholics and the idea of stepping aside, and starting to do yardwork and golf, is equal for many to the end of life’s mission. Which can be a scary thought.
For these business owners the solution should not be "find a hobby." It is not difficult to convince an owner "with nothing better to do" of the underlying reason of developing an exit strategy; it just takes some hand holding. The message should be that an exit strategy is a next chapter of life, not a transaction. Identifying and obtaining agreement to a transition timeline is the best approach. Setting concrete timelines is imperative and then setting a gauge of accountability on the agreed upon course of actions.
The business owners concern about the competency and abilities of the next generation can also be a major stall to considering and planning an exit strategy. Often, to the tune of the owner attempting to justify staying in charge by pointing out the imperfections and mistakes of prospective successors. To add to this complexity there are circumstances where successor managers are expressing that they are not sure if they are ready to be running the company.
Lastly, many times the lack of planning for succession is due to the fact that the owner has continued to reinvest into the business for it to grow and hence their personal financial situation is directly tied to the business. So, the owners simple survival is tied to the business. Other aspects of financial insecurity are based upon subjective considerations of how much is enough to be secure. Recommendations of building wealth outside of the company is highly recommended as the owner approaches the age of 60 so the owner will not fall on hard times after succession and become financially dependent on their children, an owner’s worst fear.
Hopefully, I have provided insight into the importance in developing an exit strategy, both a succession plan and continuity plan. No doubt an exit strategy can be a long and arduous task. However, if started early but slowly all while sticking to a timeline it can get all done while maintaining company peace.