Your business may or may not continue "forever", but surely
you won't!!!
There are business owners who have flatly refused to deal with this fact
and continue to act as if they will live forever. Usually they accompany
this attitude with the statement that the future will take care of itself
and they don't want to even think about it. However, this hands-off approach
to succession planning (and we will be dealing only with the closely held
business, be it family, privately or partner owned) does dictate the future
course of the business and, very often, dramatically and tragically so.
The IRS frequently becomes a beneficiary of this approach. So do heirs
disappointed by the meager return on the distress sale of the business.
That "no-good" son of your second wife, the one whose father
rivaled his son in notoriety, is now sitting in the president's chair, your
former chair!
Your wife was so overwhelmed by the needs of the business that she allowed
some second-rate advisor to run it into the very ground she is now pounding
looking for a job for herself.
The size of your business only increases exponentially the possible consequences
of your lack of succession planning; it does not at all inoculate your business
from potential ill effects, as many successful and wealthy business owners
seem to think.
Why do owners, whose very success and business longevity point to more-than-average
brain-power, choose to ignore these facts, or acknowledge them all too late?
(And, in fact, it is never too early to consider various aspects of succession
planning, as we will discuss in these articles.) Some consultants and theorists
speculate that the fear of death and acknowledging one's mortality prevents
planning. However, that isn't a sufficient answer. Everyone presumably
fears death and yet that fear doesn't stop many people from planning. In
fact, one could argue that the more intense the fear, the more the person
would want to plan.
A more plausible explanation is that, in planning for transition and succession,
certain decisions and strategies have to be made explicit. Making these
explicit, either to yourself or to others, means facing potentially unpleasant
facts ("My son whom I love so much is just not up to becoming president"),
conflicts ("If I choose my one son, the other will curse me at my deathbed"),
inadequacies ("I have let fear stop me from growing my business"),
etc.
Many successful business owners don't kid themselves. They know that,
unless they take careful aim, they will miss their mark, i.e., their goal
for their business, family and employees. They are willing to confront whatever
problems succession and transition present.
Unfortunately, the process of succession planning is too often either not
well thought out, or, remains incomplete, both being instances of a too
restrictive and traditional view of what constitutes succession planning
and not the results of ill intentions.
At least four interrelated factors define succession planning:
The needs of the owner and spouse,
The requirements imposed by the welfare of the business and its
management/employee team,
The demands of ownership transition (whether the business stays in the
family, is liquidated, or is sold to other parties), and,
The family's and heirs' concerns about inheritance
Once these themes are adequately addressed, then the succession plan can
be translated by lawyers and financial advisors into a fiscally sound legal
structure.
These series of articles will focus on these four factors.
THE NEEDS OF THE OWNER AND SPOUSE
In considering what you and your spouse need and want for the future, don't
kid yourselves! Unless what you say you want and what you are doing about
it are synonymous, then you are kidding yourself.
One business owner had eight independent businesses, seven of whom
were selling and distributing retail products being manufactured by the
eighth. The clumsy management and business structure he erected caused
an enormous waste of money. His stated intention was to transfer
ownership of the businesses to his two offspring, each of whom had established
independent careers in other fields. In meeting with him, his spouse
and the two sons, it became immediately clear that what he wanted was
not necessarily a viable succession plan, but rather a program in
which his two sons would become caretakers for the empire he wished
to build. He didn't try to involve them in any growth or strategic plans;
he didn't want to deal with the issue of their competitiveness and its
impact on the future of the business; he wasn't prepared to talk about
ownership transfer; the notion of sharing management and decision-making
responsibility he refused to entertain; and, he became incensed that
either son would dare question the business structure's money drain.
Another vignette .....
Two partners' stated intention had been to sell their business within
five years or so, and retire on the proceeds. The five years are now
up and the few offers they have seen have been meager in comparison
to their collective dream. The partners in the intervening years had
treated their successful company as a cash cow, draining off profits
rather than reinvesting in the business, remaining price competitive
on their products, developing a management team that would attract prospective
buyers, etc. What they really meant five years ago was that they wanted
to treat their business as a permanent cushion, requiring a little fluffing
up now and then, but nothing more exacting than that.
The prototypical example of inadequate succession planning is the father
who retires into the Chairman of the Board seat, leaving his son or daughter
as president. However, the father, though having relinquished both day-to-day
and strategic operations to his offspring, cannot sit still in the back
seat, whether that seat be located in Florida or home base. All too often
the stated intention of the father was to "retire" and serve as
a consultant periodically looking over his offspring's shoulders and being
available for advice when needed. However, father (and his son or daughter)
never really addressed the issue of what if father's advice was not sought
out and, in fact, ignored.
The needs of the spouse are rarely considered in advance of succession
to the detriment of the planning process. Spouses have created their own
career, social and private worlds. They may have businesses or jobs of
their own; they may have even worked in the business; they have their network
of friends, social groups, charitable organizations. In brief, they have
their own world of obligations, responsibilities, desires and needs independent
of the business owner. The impact on this world of a husband's retirement
or slowing down can be considerable. Having a full-time husband can disrupt
her routines.
More generally, the retirement of a husband and his increased presence
in the daily life of his spouse requires that the two "re-negotiate"
their marriage concerning decision-making, roles, expectations, life-style,
and more. The failure to undertake this re-negotiation process has resulted
in late divorces, husbands either going back to work or starting a new business,
fathers insisting that their son or daughter "needs" their advice
now more than ever, and similar unexpected detours.
As an aid in broaching this factor in succession planning, both business
owner and spouse might independently of each other rank order the following
overlapping set of goals or desires and, then, discuss their respective
rankings. Additional needs and concerns will emerge from their brainstorming,
which in turn could be entered in their rankings.
In fact, were business owner and spouse not to do an exercise such as this,
it would be a pretty solid indication that succession planning will become
a problem.
For your consideration, then, and in view of your needs for the future,
what rank do you place on: