Most business succession plans that I see for small and mid-sized businesses are focused on creating the most efficient tax and legal structure to buy out a retiring or deceased owner and to transfer the equity interests to succeeding owners. Much has been written on this type of planning and there are a number of talented lawyers, accountants, financial planners, and life insurance professionals who specialize in this area. At one time, I considered myself one of them.
Do not get me wrong, this work is vitally important and should be considered by all businesses. I have learned, however, that there are two components to an effective succession plan. One, is reflected in the legal documentation and life insurance policies; and the second, which is often ignored, is an actual strategic plan for the business to succeed without the owner there on a daily basis. Most business owners approaching retirement are concerned about their ability to access the value they created in the business, while keeping their legacy business functioning at a high level. This planning satisfies the practical need of maximizing the value of the owner's interest in the business and the emotional need of the owner to preserve his or her legacy.
A strategic plan for business succession requires an evaluation of how the existing employees and key customers of the business relate to the business. What are the employees' goals and expectations for the future? Are customers loyal to the product, the brand name, or the owner? It is not unusual in certain businesses to find that a significant group of employees have tied their own retirement plans to those of the owner. Is there an obvious successor? How will they change the strategy and operations of the organization? Are there skills or training that the successor lacks and are there plans to provide these? The goal of planning is to create clarity around what is currently happening, identify the values that sustain the business, and develop a vision for the future.
If an effective plan for future success can be developed for the business, the owner starts to build the confidence to enter into the legal and financial planning necessary. I would suggest that the primary reason that so many businesses do not have succession plans is an unstated fear that there is no plan for how the business can succeed without the owner. By involving the owner in the strategic planning process while he or she is still there, these fears can be overcome or confirmed. Some businesses (particularly professional businesses) are so identified with their owner that there is no real future beyond the present organization. Either way, this clarity is essential.
A successful succession plan only works if there is plan for the business to succeed.