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Success, then Succession

Author: Larry Chester

When you start a business, the end goal is to create value, generate profits, and provide a livelihood for yourself.  And whether you develop either a lifestyle business for yourself or create an enterprise business that will live after you, the decision of what to do after you stop working needs to be part of your plan.  You need to create the structure that will put a series of actions in motion that will move the company into that next stage.

There is a lot of talk about estate planning, and passing on your wealth to the next generation.  But when we talk about succession planning, it is really more than just who is going to run the company after you retire.  A succession plan needs to consider that your leaving the company isn’t always going to be a matter of deciding that the retirement party is next Friday.  I’ve learned over the years that life is tenuous.  That’s why you hug your kids every chance you get.  You try not to go to sleep mad.  You hold your tongue rather than say things that you can’t take back.

And your business is no different.  A succession plan is not just what happens to your business after your retirement party.  It is what happens to your business when you don’t wake up tomorrow.  If that sounds really crass, remember that we don’t get to pick the time of our leaving.  That’s why you sat down with your estate planning attorney and created a will, a trust, and whatever else you needed to put your affairs in order so that when you finally depart this earth, those plans are in place, and everyone – including the courts, your family members, and your management team – know what to do with everything you have of value.

We all have friends or relatives that have suddenly passed on.  A 48 year old business owner who worked out regularly, left the fitness center after a workout, and collapsed and died on the fitness center steps.  He had no succession plan.  His wife had no idea how to run the company, and after two years of struggling, sold what was left of it to one of their competitors.

Here are some issues that need to be resolved when talking about a succession plan:

Who is going to lead your company?

Part of this is understanding who your heir apparent is.  There is always going to be a period of “getting up to speed” no matter how well trained or experienced that person may be.  But in either case, you will need to have a person selected to run the company, should you be unable to do your job.  There is nothing wrong with having a few people that are trained to do the various functions that you may do on a daily basis.  The issue is that no matter who or how many people you’re preparing, there needs to be one person that ultimately is going to fill your shoes and be the final decision maker – at least initially.  You don’t necessarily need to tell the world that he or she is the “chosen one,” but you need to have it written down, in your plans for the company, so that your wishes are followed.

How is your bank going to react?

Since it’s your company, your signature is on the documents that pledge the assets of the company.  If the bank believes that you are the only one capable of running things successfully, there are likely covenants or a different set of requirements written into your loan agreements should something happen to you.  Look to your Relationship Manager at your bank to determine what would happen if you were suddenly disabled, or even worse.  How is that eventuality addressed in your loan agreement?  Does it say that any loans will be immediately renegotiated upon your death?  Or worse yet, does it say that your death is a condition of default on the loan?

Do you have enough life insurance?

The proceeds from a Life insurance policy can be used for a number of different things.  It could be used to pay down the loans that are outstanding to the bank or other lenders.  It could be used to pay the salary of a new executive that would be hired to run the company.  It could be used to pay the inheritance tax or other tax obligations that are due upon your death.  If you don’t have the ready cash to cover those expenses, your family might be forced to sell the company to cover those unplanned costs.

What is your company’s value?

Your company’s value will determine whatever inheritance taxes or capital gain taxes are going to be due upon your death.  A valuation of your company is an important planning tool.  With that information, your tax attorney and estate planning attorney will know what financial obligations would be due by your family and your company upon your death or the sale of your company.

Who is going to be the owner of the company?

There are two aspects of this.  The first is who has the legal authority to make decisions about running the business.  The second is whether that person has the business acumen to make those decisions.  Even if that person doesn’t have the experience to run the company, are they familiar with your closest advisors so that they can get the help that they need to make the right decisions for the future of your company?

Are there other owners or partners in the business?

If you have other owners or partners in your business, do you have buy/sell agreements in place that provide for a course of action if you either die or become disabled?  Those arrangements should be made during a time when you and the others are all in good health and have a good working relationship.  Making those decisions during a time of duress is not productive for you or the other party.  Having an established course of action if something happened to you is important in making sure that your wishes are followed, your company continues to function, and your heirs get the most value for what you’ve built over the years.

Over the past two years, attorneys have been very busy, as the pandemic brought people face to face with their own mortality.  But the planning that needs to take place isn’t just planning for your family and your estate.  Your most valuable asset, your company, faces issues similar to those your family will face in the event of your death.  Those issues will impact not just your family, but likely every employee that depends on you for their family’s futures.


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