Building Business Succession Plans

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Tony Dorn

by Partner Tony Dorn

Have you noticed lately that your investment advisor is getting a little more gray hair?  Or that your insurance agent is forgetting to call you back more often?  Or that the family doctor you have had for the last 30 years is spending more time in the hospital than at the hospital?  Well if you have, you are noticing the aging of our workforce right before your eyes.  Some of these people are easily replaceable while others are not.  These are not the only examples; many family run businesses are also “graying.”

When most people think about companies that provide goods and services in this country they think of the large ‘mega’ companies like GE or Proctor and Gamble.  However, what they don’t think about are the large amount of family owned businesses that make up our national economy.  Roughly half of our national GDP comes from these companies.  Isn’t that amazing?  These are the local hardware stores, the manufacturing company that has been in your town for decades, the local doctor, the town insurance agent that takes care of all the people you know, and countless other small businesses around town.  These businesses keep our economy running and provide the backbone of the American dream.  They pay taxes and create jobs.  They keep us competitive with foreign products and services.

So what is the biggest single threat to these companies that are privately held and in some cases been ran by the same person or persons for decades?  The answer is simple:  Who is going to run the business when the family patriarch or main decision makers are gone?  It is estimated that less than half of these companies have a succession plan in place to identify how the company will continue once the current leadership retires.  This is a huge problem for our economy.  Most of the time, like any hard task, business owners often kick this can down the road, vowing to ‘get to this next year’.

Why?  Oftentimes successful business owners are hesitant to turn over their life’s work to someone else.  Additionally, they have a hard time identifying a person or person that can fit into their vision of what the company should become.  Maybe they would like the company to stay in the family but aren’t confident in the next generation’s ability to handle the responsibility and demands of running the business.  There are a myriad of other reasons as well. However, the smart business owner recognizes that building a succession plan is vital to the current and long term health of the company they have created.  Closely held companies that don’t have a plan in place are becoming less and less attractive to potential customers who may worry about what happens to their relationship when the current owner leaves.  People like certainty and risk avoidance so they will gravitate to companies that have built a plan for when current leadership exits.

In my business, I know clients will feel more comfortable knowing that they will receive the same level of services and care they have come to expect, even if I am no longer here.  I hope I’d be missed, but my expectation is that my successor (who has already been identified and introduced to the client, by the way) will know the client and their situation as well as I do, and be able to provide the client with everything I have over the years.

So the magic question is:  How to go about building a succession plan?

I believe in putting a formal plan in place and taking it step by step:

  1. Figure out what your ultimate goal is.
    1. Do you want to maintain the business in the family?
    2. Do you want to sell the business at retirement?
    3. Do you want to wind down the business to ultimately close when you retire?
  2. Identify Key People or Companies who would ultimately replace you.
    1. Would the person be a family member? If so, who?
    2. If the plan is to sell, who are some likely buyers?
  3. Document this plan in writing.
    1. Broad strokes are ok but details are preferable. Putting a plan in place and then executing it is the best chance of success.
    2. Provide this plan to the key players involved and review with your lawyer.
  4. Financing/Buyout
    1. Discuss best structure with your advisor/legal team that will be most beneficial to you/your estate as well as the purchaser.

These are the steps I typically follow with my business owner clients and have found them to be effective.  Many issues are identified as we work through this list that helps us formalize the plan.  Oftentimes, clients discover that although they originally planned on keeping their business in the family, there is no interest from the family to continue the business.  Alternatively, clients that had assumed no family member wanted to continue the business, were surprised to find out a clear interest and talent from a family member equipped to grow and maintain the business.  None of these conclusions would have been achieved had the client continued to ‘kick the can down the road’.

In closing, the issue of financing the buyout or sale of the business is always a large concern for any prospective seller and buyer.  There are creative ways to structure the deal to make it attractive for both parties.  Sometimes self-financing the sale or tying the buyout to revenues is preferable while other times one-time payments are preferred.  There is no one size fits all and all options should be vetted with your Family CFO, legal counsel, and other advisers.