The success of estate and tax planning depends primarily on the creativity, expertise, and effectiveness of devising a plan that accomplishes the client’s goals in a manner that is economically sound and reduces taxes to the extent legally possible. But the success of a business succession plan has no relation to the effectiveness of the plan that is crafted. The most creative, thoughtfully drafted and fiscally prudent plan can never be effective if it is never implemented. Success in succession planning is primarily, if not solely, dependent upon the willingness of the parties to implement the plan. Unless the parties to a succession plan understand and deal with the emotional and psychological factors unique to the business and to its owners, the best plan will fail miserably.
At its core, succession planning is about relationships. Most significant is, of course, the relationship between the founder of the business and his or her chosen successor. But other relationships can have significant role in developing an effective plan. It is vital to understand the relationship of the founder and his or her business, the role between the successor and the business, and the roles of the founder and successor with other stakeholders, such as key employees, non-family shareholders, and customers and vendors. It is important that the relationships that exist on all of these levels be understood and taken into account as a plan is developed and implemented.
There are three primary concerns which a founder and a successor must address and resolve as part of a succession strategy.
- Control. Who will possess the power to direct and control the business when the plan is implemented? This question must be asked in terms of who has control, not necessarily whether the person who has control intends to exercise it. Many founders repeatedly state a desire not to exercise any further control once the succession is in place. But if the founder has the ability to exercise that control, whether or not he or she intends to use it, that potential could create an untenable and ultimately harmful transition environment.
- Involvement. How active and present will the founder be? The founder needs to ask himself seriously, can he step back from the business; can the successor lead the business; can the successor operate the business while the founder is still involved in some capacity? Often the founder and successor have very different ideas as to how much the other will be involved in the business as the succession takes place. This must be pursued and understood by all parties to the plan.
- Compensation. How much money does the founder need to live; how much money does the successor intend to make once he or she begins exercising more control; can the business afford to meet the founder’s needs and the successor’s expectations?
There are two elements of succession that are separate but nonetheless interdependent. The first is ownership and the second is management. Both must be separately addressed and may require different solutions, but they are so interrelated that both must be thought of in tandem. The concept of ownership is who will own and control the business; who will share in the growth in the equity of the business going forward? Management involves the question of who will run the business and draw the short-term benefit of the success of the business through compensation and bonuses. Founders are often willing to relinquish management but not ownership. Successors sometimes want ownership without being willing to assume the risks of management.
At Stock and Leader in our efforts to move parties from concept to completion of a successful plan, we engage in four steps.
First, we listen and learn about the founder, the successor, and the business. We visit the business and meet with the founder and the successor as well as other stakeholders in the succession plan. Only by knowing the expectations of all involved can we effectively craft a plan that has any chance of success.
Second, we will speak the truth to all involved. It is of no service to the founder or the successor if advisors are not honest and direct. If there are obstacles, they must be identified and discussed. If there are rivalries, if there are issues with blended families or second marriages, or issues within the family history, these must be identified, placed on the table, and discussed. It is our role to advocate for the business. It is the success of the business that should be the end result of a plan. To reach that successful end result, it is incumbent upon us as advisors to the business to speak openly and truthfully.
Third, develop a proposal. We will offer a broad outline of objectives, goals, and techniques and propose a realistic timeline. Many plans fail in the implementation because a realistic timeline is not developed and adhered to. A clear understanding of objectives for completion of the plan must be understood by all parties.
Fourth, we will develop state-of-the-art techniques to implement the plan. We are skilled in the development of stock purchase agreements/redemption agreements to accomplish the transfer of equity interests. We are skilled at drafting and implementing employment contracts, consulting contracts, and bonus plans to assure the compensation of key people. We have been involved in the development and implementation of employee stock ownership plans and insurance funded agreements to assure liquidity for heirs and for the company. We will draft shareholder buy/sell agreements, leases, installment sales agreements, promissory notes, and security instruments to implement a plan that meets a particular business’s needs and goals.
Ultimately the success or failure of a business succession plan depends upon the willingness of the founder and the willingness of the successor to make it happen. As the advisor guiding the business through that successor plan, we can establish and maintain a timeline and make sure that the economics of the business match the goals of the parties.
As advisors to numerous family owned small and medium sized businesses, Stock and Leader firmly believes that it is not what the founder has accomplished while he or she was running the company that will have the most important and long lasting impact. It is the manner and condition in which the founder leaves the company for future owners and future generations that will be that founder’s true legacy.