Do You Have A Succession Plan?

If you are like most business owners, a significant portion of your net worth is tied up in your business.  As such, it makes sense to take the steps necessary to maximize the value of your business whether you intend to sell the business soon, eventually or maybe never.  The same thought applies for a business owner who wants to eventually pass the business on to the next generation.  Certainly the business fundamentals, including a solid balance sheet and good profitability, drive the cash flow equation.  Cash flow in turn drives the business valuation calculation.

However, there is more to the calculus than filling in the numbers to a formula and “turning the crank”.  Other factors can significantly impact the value of your business.  For instance, in comparing two similar businesses with similar financials and cash flows, if the profitability of one business is dependent upon the direct involvement of the business owner, that business is not as valuable as the similar business that runs without the direct involvement of that business owner.  The latter organization is much more valuable because it can sustain the absence of the business owner, whether by chance or by choice, and continue to flourish.  The key to developing that kind of organization is having an effective plan – a succession plan

The first step in developing an effective succession plan is to assess the risks associated with the departure of the owner and other employees who are critical to the success of the firm.  Start with a series of brainstorming sessions between the owner(s) and a trusted set of advisors who can address tax implications, management control issues, legal issues, etc.  The owner should then define what he wants to achieve with his succession plan.  He or she should not allow the attorneys, CPAs and investment advisors to dictate the plan.  Key instruments to be developed include buy/sell agreements among the owners, their spouses and potential heirs.  In the case of partnerships, partner operating agreements must be developed.  Additionally, a “plain English” document that translates what the legal documents say is imperative to ensure the owner’s wishes are adequately addressed.

A second aspect of succession planning is managing the talent pool within an organization.  Just as a coach practices, drills and manages playing time on the court for his team members in order to develop a deep and experienced bench, a business owner must develop talent within the organization so that if a key employee exits the company, whether by chance or by choice, there is a stable of internal talent ready to step up to the next level of leadership.

In order to develop an effective succession plan, a business owner must first make the commitment to spend time working on his business rather than in it.  Some owners may think their business is too unique or too complicated to work through a plan.  Others may struggle with finding the “right” time because they are so busy.  The consequences of not having a robust succession plan can be disastrous for the value of the firm and the net worth of the owner’s family.  Although these principles are not difficult to understand, there is a great chasm between intellectual understanding and actually executing.  However, that chasm is well worth investing the time, effort and treasure to bridge.  It is critical to develop a succession plan before there is a crisis and the emotions surrounding the event stand as a barrier to clear thinking.

At The Alternative Board, we work with business owners to build the plans they need to succeed and can help you develop effective succession plans.

Keith Mayeaux, President, A+ Corporation, Gonzales, LA
Tim Stoll, Owner, The Alternative Board – Metro Baton Rouge