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. 

Warning. The execution phase of succession planning requires singleness of purpose. Within the first 90 days of succession planning, you will likely find issues and gaps with your plan or personal retirement plan — items that need tending. Don’t let these issues become a distraction to your ultimate goal of developing a clear and actionable succession plan! To stay focused during this phase, use the following questions to keep your plan on track.

• Who will help you execute and monitor the plan?
• What are the gaps and issues?
• How can you prioritize fixing the gaps and issues?
• What if all doesn’t go as planned?

Maintaining Deadlines

Succession planning for small businesses can be accomplished within 210 days if you don’t let these issues become a hindrance. But often, business owners feel that they have to have every detail figured out before they can execute. Not so. For example, you may have:

• Wills that need updating based upon new tax laws
• Missing non-compete agreements with some of your key management
• A woefully inadequate disability policy based on the level of income needed
• Your personal investment portfolio performing below average (e.g. 1 percent rate of return when it needs to be at least 5 percent)
• Legal entity structure changes needed to pay less tax upon sale
• Unaddressed estate tax problems

Rather than diving into one rabbit hole after another to tackle each of these somewhat complex issues, document each one and prepare a to-do list. In the check-in meeting with your advisors, share the list and prioritize it. This process will help you move along the path of creating a well-written succession plan while scheduling the action items that will support smart execution of your plan down the road.

Now it’s time to meet with your advisors, which can include your lawyer, CPA, financial advisor, board and/or board of advisors and leadership team. Give them an outline of your progress over the past 90 days, your discoveries and expected next steps. It is important to discuss the following in this meeting:

• Plan A and Plan B – Plan A is your preferred scenario for transitioning out of the business. However, things can change in year one, three or five…requiring a back-up plan. Discuss your preferences and potential changes that could require shifting from Plan A to Plan B. This will keep you on the same page with your advisors and help you prepare logically and emotionally for that shift if necessary.
• Your list of gaps, issues and problems for Plan A — let your advisors weigh in on these and other issues they foresee.
• Your list of gaps, issues and problems for Plan B — again, gather advisor feedback and any additional foreseeable issues that may be different than in Plan A.

Do not let the blind spots or additional issues brought up in this meeting distract you from the ultimate goal of creating a plan. Obstacles can be overcome in most scenarios by taking them one step at a time. Right now, you are simply gathering feedback and advice. Don’t give up even if the issues seem insurmountable. Stay in control of the process.

Name a Quarterback

When I say that business owners should stay in control of execution, I mean that owners are the ultimate decision makers in the transition of their businesses. However, that doesn’t mean trying to handle every detail. You are still trying to run a business! Instead, place a chief advisor in charge of facilitating discussion and outlining next steps. This advisor can be accountable for research, scheduling the next check-in meeting and coordinating feedback from other advisors.

Some business owners prefer their CPA in this role (like a succession planning quarterback) while others choose their attorney or financial advisor. Just make sure it’s a trusted relationship that you believe will keep things moving forward in a timely way and bring about the best results. By choosing a quarterback, you can avoid your own blind spots in the planning process as well as soften the emotional impact of certain decisions.

For example, many small business owners avoid setting up an emergency management plan. This plan provides a designated leader or leaders to operate the business in the event of an owner’s incapacitation. Because buy/sell agreements are only engaged if the owner dies, an emergency management plan fills that gap if the authorized person is in a coma or otherwise disabled. Designated leaders are given limited legal power to make financial or other important business decisions and operate the business on behalf of stakeholders such as family members. You can even include incentives for key people to stay and see the business through a set time period until transition or succession decisions can be made.

Now that you have organized your advisory team (including your quarterback), determined your Plan A and Plan B and received feedback on gaps and issues, it’s time to assemble all the documents and create a timetable and strategy around communication with family and key employees/managers.

Continue reading for the last phase in Succession Planning: Phase III – Communication: Establishing Timing and Deliverables for Your Succession Plan

For more information on guiding your small business through succession planning, talk to the tax team at Cornwell Jackson.

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. 

Phase I – Assessment

Because your business is probably your largest asset — and because it also is probably your largest single source of income — your decision-shaping and calendar of events for your plan are going to be built around assessing alternatives to preserve the asset, nurture the asset, monetize the asset or liquidate the asset for optimum results for you, your family and the business. Some of the questions you should ask as you begin the journey of planning your succession are:

• What is your business really worth?
• What do you really need in retirement?
• How does ownership translate into retirement assets?
• Who will step into the ownership role(s)?
• What’s your Plan A and Plan B scenario?
• What will you do next?
• What is your timetable for fully transitioning out?

So, what is your business really worth? If you’ve never had a formal or even informal valuation of your business, now is the time to schedule it. You will need a reasonable estimated value of your business — and an honest assessment of after-tax available cash to you in the event of a sale. You need a valuation regardless of whether you desire to sell to a third party or to your management team, or create an ESOP, family gifting or charitable gifting options.

There are formal valuations and there are informal valuations. For the purposes of succession planning, most small business owners simply need a valuation professional to determine an estimation of value within $100,000. Don’t try to calculate the value online with a low-end, do-it-yourself tool. All of your decisions going forward derive from this number, so it pays to consult a professional.

Once you have a clear estimation of value, you will want to visit with your investment advisor or financial planner to assess your personal finances, current and post retirement cash flow, retirement goals and sources of cash flow up to your official retirement date. In my experience with succession planning, this process will take at least three separate meetings in order to:

• Determine what you want to do in retirement
• Assess the lifestyle you want to maintain
• Incorporate the vision of the next successful chapter of your life into the succession plan

During this discussion, you may want to decide how much, if any, you want to continue working in the business. Independent of any valuation or legacy issues you carry, what would be a fair amount for you to be compensated in a less than full-time position at the company? What are the primary areas where you could add value to the business on a continuing basis?

Establish Plan A and Plan B

This decision, of course, hinges on the most likely acquirer of your business. You will need to rank on a 10-point scale the likelihood and viability of a sale or transfer to:

• Your own family members
• Your current management team or business partners
• Your employees taking ownership stake through an ESOP
• A strategic buyer
• A private equity firm

Whichever option gets the highest ranking, call that “Plan A.” But call the second highest option “Plan B.” We’ll talk more about why having two options for potential owners are important in the execution phase of succession planning.

In addition to ranking a potential successor or outside buyer, you will need to obtain and review all of the following agreements and legal documents. You may find during this process that there are documents you don’t have and will need to create.

• Will and estate documents
• Emergency management plan – who gets the keys if you are temporarily out of commission
• Shareholder agreements, often called buy/sell agreements
• Bylaws or operating agreement of the business itself – voting, officers, classes of stock, etc.

The final piece of your Phase I Assessment is to target a specific year that will be the year of your exit — no matter what form that takes.

As you assess your current situation, including decisions around successors and timelines, your CPA should support you with a clear picture of cash flow, debt and proper entity structures. Your CPA can also help you assess certain buy-out scenarios that may involve selling to internal stakeholders, courting an external buyer or creating an ESOP. Rely on your CPA to weigh the pros and cons of your Plan A and Plan B to ensure that they are viable choices.

Once your first 90 days of planning are completed, you should begin to understand where the gaps lie in order to set the timeline for succession planning execution. Review each step that has been accomplished so far with your advisory team. Most of all, congratulate yourself for moving toward a viable plan for your business transition.

To continue reading about succession planning, read: Phase II – Sharing and Executing the Succession Plan

For more information on guiding your small business through succession planning, talk to the tax team at Cornwell Jackson.

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.