Business Succession Planning
How to avoid the reefs in your business voyage
Among the most important factors for a Captain of a ship to consider before he leaves port are details of his destination, how best to get there and the potential hazards en route. He also needs to know who is going to take over command if anything happens to him.
Without these measures how could a captain be in control of his ship?
How could the safety of the ship and those aboard be assured unless contingency plans are meticulously arranged?
There is a striking analogy between the ship’s captain and business owners.
There is plenty of evidence to support the argument that leaders of businesses, while usually having a grasp of where they’re starting from, have never really articulated a vision for the future (a picture of where they want to be) or identified and planned for many of the hazards along the way.
A ship with a captain who knows not where he’s headed is no better than a ship without a rudder. There’s no real control over where it’s going to finish up! And a business without a vision and plans for the unexpected is no better off.
With family companies especially, the question of management succession is often overlooked and yet the hardest and most costly thing for a business to replace is its people.
Andrew Carnegie, the world famous Industrialist, said: “Take away my factories, my plans; take away my railroads, my ships, my transportation; take away my money; strip me of all these, but leave me my MEN, (or woman!) and in two or three years I will have them all again.”
Questions to ask
Some major critical issues can be addressed by asking these questions in relation to your business:
If I die, who will finish up running the business?
If my wife will own the business in the event of my death, will she have the capacity to run it successfully?
How quickly will the value of the business deteriorate if I, or someone critical to the business, dies?
Is it important to me that the business carries on if I am no longer around?
Would I be concerned about being forced to run my business with someone not of my choice, i.e my partner’s wife or son or daughter, or even a competitor?
Is it easy for me to find money to buy back any partners’ shares from his estate/beneficiaries?
How much do I care about the equitable rights of my family and my partner’s family?
Can I afford to pay out debt if my partner dies to avoid complications with the bank?
What plans are in place to ensure that, if I am no longer around, the business operation will continue smoothly?
Do I have a plan to ensure the continuity of my business?
Who will skipper?
These issues can be dealt with under the broad scope of succession planning. This involves identifying your vision for the future of the business under certain circumstances and making provision to ensure that your desires for business continuity and ownership are implemented smoothly, with benefits to the business and its stakeholders.
Roy and Jane have a thriving engineering business employing some 30 people. Both work in the business but it is accepted that if Roy dies Jane will not wish to continue on her own. She would want to sell the business.
But how long can she sustain the business before a buyer is found and a sale completed? How much will the business be worth after customers and key employees are wooed by competitors?
A capable and keen senior employee, Jim, is identified and an agreement made that in the event of Roy’s death or disablement he will buy the business. Funding for the purchase price is provided through insurance on Roy and legal documentation is drawn up to support the plan. This succession planning will include appropriate training and development for Jim.
Tom and wife Sue have a thriving construction business in which their son Peter is involved. While being a knowledgeable and enthusiastic employee his ability at this stage to run the business in the event of his parents loss or withdrawal is doubtful. Son-in-law Graham, however, shows all the attributes.
Tom and Sue really want to leave the business to Peter but recognise the contribution of Graham and the fact that ideally he and Peter should work together to grow the business successfully.
A succession plan integrating business estate planning with team development and shared vision between the employer and employees provides a foundation for future changes to occur with minimum upheaval.
Through insurance Tom makes sure that money is available to deal with debt and temporary loss of profitability in the event of his loss.
Setting a course
As the captain of a ship must identify the needs along his course and plan for the worst by having adequate safety and rescue equipment, so is it desirable for business leaders to plan for certainty out of the unexpected hazards they face.
It is generally recognised that we go into business to create clients, build assets and make profits.
It stands to reason that an important part of best practice is to protect the continuity and financial stability of the business so that we can continue to achieve those objectives in the face of adversity… and in doing so look after our clients, our families and all those who have an interest in the ongoing success of the enterprise.
Estate Planning DNA specialises in consulting to businesses in the area of succession planning. Its objective is to assist business owners to crystallise their vision for the future and build plans to protect against the hazards that may stand in their way.
By Mike Sayer of Estate Planning DNA. Mike specialises in personal and business Succession and Estate Planning.
He can be contacted on 0417 952 183.
10 Misconceptions & Realities about Succession Planning
Business Succession Planning is a “Code Word” for “Putting Dad (or Mum) out to pasture”.
Transferring ownership doesn’t mean retirement.
Business Succession Planning creates more problems than it solves.
Business Succession Planning solves problems in advance.
Business Succession Planning is a one-way street.
One person’s “Exit Strategy” must be the next person’s “Entrance Strategy”.
Misconception # 4
My business isn’t worth enough to worry about.
Valuation is the key to the future.
Misconception # 5
I will be forced to treat one or some of my children unfairly.
Fair does not always mean equal.
Misconception # 6
It’s too early for succession planning.
The future has a way of arriving unannounced.
Misconception # 7
Any Buy/Sell Agreement will do.
You need a Buy/Sell Agreement that works.
Misconception # 8
My children will work it out – they know what my wishes are.
“The only way to really get to know someone is to share an inheritance with them” (Mark Twain)
Misconception # 9
None of my children are in the business – I have no succession alternatives.
There are alternatives.
Misconception # 10
It’s nobody’s business but ours.
All businesses have default Succession Plans.
In 2015 at the age of 50 David, an experienced helicopter pilot, suffered a stroke as a result of a process to repair an aneurism. At the time he was the CEO of one of the largest private aviation businesses in Australia which he and his partner founded and built over some 20 years.
Not only was his life threatened but his ability to continue his career was brought to a sudden halt with consequences for his stability both financially and emotionally.
Some 8 years earlier he and his business partner had the wisdom to implement a business succession strategy supported by insurance funding which enabled him to exit the business with dignity and financial security.
This is his story.