When I work with small business owners, particularly family-owned businesses in manufacturing and distribution, succession planning is stalled because of a lack of communication. Owners don’t want to face the sometimes tough conversations around who will take over the business and what that will mean for family members, employees or customer relationships. Before beginning the final phase of building your succession plan, consider the following questions:
- How will you communicate the plan to leaders, clients, employees, family?
- What can reinforce buy-in and cooperation?
- What contracts and documents must be in place?
- What is the exact timetable and launch?
Usually, I try an objective process of elimination. If there are family members in the business, I ask if any are interested — and able — to operate the company. Based on the owner’s responses, we take a look at other scenarios such as a leveraged buy-out or ESOP arrangement. And finally, we look at the potential for selling to an outside buyer (e.g. private equity, competitor, affiliated vendor).
Based on the owner’s selection of a Plan A and Plan B succession scenario, we have to plan communication with family and management. The depth and detail of communication is directly related to how significant each family member’s or management leader’s role will be in Plan A or Plan B. The smaller the role, the less detailed you will be in communication. Key topics of discussion may or may not include:
- How your buyout or retirement will be handled and impact on the business operationally and financially going forward
- How the plan will affect each stakeholder in particular – who will be offered stock or ownership
- How you are dealing with family members not involved in the business — helping them understand that the business is like any other stock in their portfolio
- Your planned date of exit
- Getting feedback on their concerns
There may be some hard conversations. This is where you can seek help from your advisory team to guide the conversation. For example, I’ve seen situations in which a child thinks the parent will bring him into the business, but the child doesn’t have any experience or education. You may also have one child already working in the business and another who isn’t. The parents want to be fair to both children, but it’s not necessarily the best decision to hand the reins of the company to both.
The same conversations must be discussed with management. Depending on the details of Plan A and Plan B, you want to avoid a mass exodus of skilled management. Therefore, discussions of transition should also include compensation of key employees to support retention and timely — rather than sudden — exits.
Set up the Timetable and Deliverables
The final timetable is of utmost importance so that you can address issues and gaps in your plan, properly structure your exit and leave the company in good hands.
Let’s say, for example, you have seven years to exit. In year three, you may arrange to step out of the CEO role and take on a support role of transitioning relationships and training management. Making such transitions over time is usually best to preserve customer relationships and value of the business.
Owners must also set up a timetable for addressing and solving issues and gaps in the plan. Perhaps you need to restructure entities for a better tax position upon sale. You may have outstanding debt and collections that need cleaning up. You will need to schedule a valuation to determine the true value (or estimation of value) of all company assets. You will also need to revisit your organizational chart to determine hiring of key management and/or transition of management.
The last 30 days of your succession planning involve reviewing your written Plan A and Plan B, establishing a timetable to address gaps and issues, and ensuring that many documents are updated and in place. Some of the key documents in a succession plan can include the following:
- A one page executive summary succession Plan A and Plan B in writing
- A management emergency plan
- Shareholder agreements – buy /sell
- Review of wills and estate plan documents
- Purchase price formula or method with discounts and terms
- Final proforma balance sheet, income statement and cash flow
Remember, you are not alone in this planning. Rely on your designated succession planning quarterback, such as your CPA, to keep everyone on your advisory team informed and involved. You will be amazed at the sense of relief after handling a critical piece in business ownership — that is, how to leave your business in good hands.
For more information on guiding your small business through succession planning, download the whitepaper: Do You Need a Succession Planning Starter Kit?
Gary Jackson, CPA, is the lead tax partner in Cornwell Jackson’s business succession practice as has led or assisted in hundreds of succession and sales transactions. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services such as succession planning to management teams and business leaders across North Texas.
