One of the ways that we open discussions regarding business planning with clients is to ask various “What if…” questions to provoke deeper thinking in certain areas. In the realm of estate and business succession planning, the classic “What if…” question is, “What if you were hit by a bus tomorrow? What would happen to your business?”
Although the example of being hit by a bus is somewhat dramatic and not likely to actually occur, the same type of planning should be in place to answer that question as well as the more mundane triggering events for transitions of ownership and responsibility in a business.
The three main areas of transition that closely held business owners face in working on succession plans are: (1) transition of ownership; (2) transition of knowledge/experience; and (3) transition of leadership.
- Transition of Ownership. A transition of ownership can be accomplished in many ways from simple estate planning, cross-stock purchase agreements, redemption agreements, and other purchase agreements that may be funded by insurance, notes, founder’s pensions, etc. to more advanced methods such as ESOP buy-outs or public offerings of stock. Many of the professionals who advise business owners are specifically focused on this type of transition since accountants, attorneys, investment advisors, and insurance agents all play a significant role in accomplishing this transition. Therefore, for many business owners that have a strong advisory group, the transition of ownership is often the most complete portion of their business succession plan.
- Transition of Knowledge/Experience. For many business owners, their knowledge and experience of their business has increased incrementally over many years. This is especially true of the founders who may have started the company on a shoestring, out of their garage, or with just one truck, etc. Their knowledge and experience in the business was allowed to grow organically with the business itself. It is hard to transmit that level of knowledge and experience to a buyer or the next generation of a family business over a relatively much shorter time-frame. In fact, it may be nearly impossible to replace the founder with just one person that has the requisite knowledge and experience to take over all of the tasks that the founder accomplishes (sometimes without even thinking about it). Bringing in an advisor to help the founder and the company set out more formally the roles that the founder and the other management members encompass, and beginning to groom other managers in discreet areas of responsibility are key steps in making the knowledge and experience transition seamless.
- Transition of Leadership. Are leaders born or are they grown? How does business transition from the entrepreneurial leadership style of the company’s founder to a more managerial or administrative leadership style of a successor taking over a mature business? This is often the hardest transition for a business to make. It is especially difficult if the transition is brought on suddenly where the next level of managers, or the next generation of family members, has not had an opportunity to flex their “leadership” wings. Hand in hand with the knowledge and experience transition plan would be a leadership transition plan that includes some areas where managers or the next generation of family members would take on clear leadership roles. These would be roles where they would be given authority and responsibility to lead an area or group of the company’s employees with only minimal oversight by the first generation. In this transition, one of the hardest things for a founder is allowing the next level of managers or the second generation to fail without stepping in to correct the behavior too early. As we all know, failure is one of the hardest and best teachers and a potential leader’s mettle cannot truly be tested unless it has withstood the fire of failure.
So, have you tackled the Bus Question in your business? If you can’t answer the Bus Question, or if you find that your answer leaves much to be desired, get together with your professional advisors to help craft a better succession plan.
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