Succession Planning

By Douglas P. Cushing

Succession planning is a business preservation technique. It involves making a plan for transition of management, and ultimately business ownership, usually to the next generation. The process requires evaluation expertise, tax advice, legal skills, and psychological understanding of the company's key staff; of great value is the ability to safely navigate the minefield of family dynamics, often neither linear nor logical.

The first step in the process is taken when the manager-owner, often the founder, determines that he or she doesn't want to run the company forever. Unless there is a buyer perched on the doorstep, or the company is truly a "one-man band," the next step requires sorting out who is next in line to take over management and then to work out a plan to effectuate a smooth transfer.

Why is the planning process so essential? Most businesses do not successfully make the transition to a second, and let alone a third generation. The pitfalls are many. The owner may have an unrealistic expectation of value, or be unable to walk away from the company, or even throttle back his or her involvement. Family members may expect to take over whether or not they possess the skills or expertise needed to run the company. The family situation may be loaded with built-in conflict if ownership is shared to achieve estate planning goals but control is given to only one or two family members. Nonfamily staff who are not given an appropriate role (in their view) may feel effectively pushed out and choose to leave rather than remain subject to what they perceive as unqualified management.

These are the principals in the process, some already noted:

• A founder or key manager who plans to exit;
• Critical employees, family or not;
• Any next-generation family in the business;
• Family members not in the business but who have a future financial stake;
• An evaluation expert;
• Expert advisers: CPA's, financial planners, and lawyers;
• Independent business contacts or board members; and
• Sometimes a mediator.

Ultimately, not everyone will have a piece of the action, but everyone should have a say in and an understanding of what is going to happen. The process is often too fragile for it to be a top-down imposed structure. The plan need not require a vote of approval by everyone in the family or business, but there will be a much greater chance of success if there is a true consensus.

When should this process take place? Well before an unexpected tragedy removes the founder/CEO without a plan in place. A large corporation lost a new president/CEO three years ago to a plane wreck only one month after he took over the position. Fortunately, they had a process in place that enabled them to name a new successor, and their company continued without interruption. There must be time to train, hire, or season the next generation's leader, whether family or not. Ideally, the process will begin at least two to four years before an owner steps back or steps out. Putting together all the elements can't happen overnight. Planning for succession in the right way is essential to facilitate a successful transition.

Published Fall 2009

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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