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It’s been 225 years since Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes.”
Whether you like it or not, there is another certainty for business leaders: sooner or later, one way or another, you’re going to have to leave your business.
And even though experts said most business owners don’t pay enough attention to it because it’s one of the most daunting challenges they will face, when it’s time to leave their company, business owners and executives better have a succession plan in place.
“It’s critical for a business to have a succession plan,” said Keith Maio, president and CEO of National Bank of Arizona. “It’s only fair. It’s less about you as a leader and more about whether or not you’re thinking about everyone else in the organization. If you want the business to succeed beyond you, you’ve got to have a succession plan in place.”
Before you rush out to create your succession plan, Gregory W. Falls, a member at Sherman & Howard who specializes in business and corporate law, said to avoid three mistakes that companies often make when creating a succession plan:
• Leaders name and anoint their successors-in-waiting without considering the repercussions.
• The conflicting demands of ownership, management and family (especially in a family-owned business) are not balanced.
• Once prepared, the plan sits in a file. It does not grow, change or adapt to new circumstances.
“Great leaders do not begin by setting vision and strategy,” Falls said. “In his book, ‘Good to Great,’ Jim Collins wrote, ‘First they get the right people on the bus, the wrong people off the bus, and the right people in the right seats.’ Have the right people in the right places and listen to them.”
Financial experts said having a succession plan in place can have a positively impact on the financial health of a business even in the midst of dramatic change. “A proper succession plan minimizes the impact of a business transition, whether by sale, a coordinated changing of the guard, or through a sudden loss of key employees or owners,” said Joseph Macdonald, a financial professional with AXA Advisors Southwest. “The business can continue to operate, without missing a beat, under qualified leadership. Employees and customers will not panic, quality will not suffer and the business will have ample liquidity to address any needs as they arise, all helping to maintain the health and value of the company.”
Without a succession plan in place, experts said the future long term viability of the company is in jeopardy. “One the main reason for this is the loss of an owner or shareholder due to retirement or an untimely death,” said Danny Nelson, CEO of Nelson Financial Group. “Additionally surviving shareholders may or may not want to continue to operate the business with the exit of key principles or major shareholders who have been so critical to the success of the business.”
Nelson said it is essential to develop a plan that addresses retirement, disability or an untimely death of these key individuals to maintain operations and profitability under new leadership that has been agreed to be put in place to successfully transition the business.
“If the owner or key employees are no longer able to work due to death or injury, unqualified people — often well-meaning family members who are simply over their head — try to run the business and fail,” Macdonald said. “They lose clients, revenues, employees and ultimately the business value. The same can happen when a business owner retires, sells the business, carries the financing for the sale and the new owners fail – often causing the previous owner to come out of retirement and try to salvage the now damaged business and relationships.”
To prevent that from happening, Macdonald said business owners and executives should put together a succession plan that includes theses key elements:
1. Clearly defined goals and vision for the business.
2. Build an expert succession team that includes a business/estate attorney, accountant, business appraiser and financial advisor.
3. Qualify the successors to ensure they are capable of running the business (your retirement may rely on it).
4. Place life and disability insurance on the key employees and owners to provide liquidity to the company in the event of a tragedy.
“Engage in an open dialogue about the issues unique to your company and its succession plan before the conflict of change arises,” Falls said. “Put the plan in writing that can be understood and followed, and review and update it on a regular basis to address changing circumstances internally and externally.”
