Texas Business Dispute Blog

Wednesday, September 28, 2016

Business Succession Planning Part 1: Don’t Wait for An Emergency to Put a Plan in Place

By: Ladd Hirsch

 

The health-minded business owner who diets, exercises and receives good medical care, may receive a robust physical report suggesting he or she will live forever.  Counting on immortality as a succession plan, however, is a bad bet.  The business owner concerned about the future will want to prepare both a long-range plan and an emergency plan. The long-range plan will lay the foundation for the owner’s future retirement, while the emergency plan will detail the steps that the business must take to survive if the owner is suddenly absent from the business due to illness or accident.  The emergency succession plan does not magically become reality, however, and it takes careful thought and skillful management to do succession planning the right way.

Part one of this Post begins with a focus on developing the emergency succession plan that will govern in the event that the majority business owner suddenly becomes incapacitated.

Communicate & Collaborate

For an emergency succession plan to work properly, all participants must buy into it.  Problems arise when this buy-in is not achieved.  For example, if the owner desires for his son to take over the operations of business in an emergency situation, but the owner’s son is reluctant to do so, when an emergency actually takes place, the succession plan will be scuttled at the outset.

The key to a successful emergency succession plan is to secure consensus from the company’s top leaders.  Merely telling people what the plan will be in the event of an emergency does not achieve or reflect agreement.  The succession planning process requires the company’s leaders to participate in the plan, provide meaningful input in the planning process and sign off on a final, written plan.  In addition to this groundwork, the owner also needs to continue to discuss the plan regularly with the company’s leaders and adopt changes that may be necessary.

The emergency succession plan needs to address all of the following issues: (1) who will manage the company’s day-to-day operations while the owner is unavailable, (2) what message should be issued to reassure all of the company’s stakeholders (employees, customers and lenders) that the company has an action plan in place to deal with the owner’s absence, (3) who will deliver that message to these vital  stakeholders, and (4) what is the company’s fiscal plan for dealing with any downturn in revenues resulting from uncertainty about the owner’s status.

These are difficult questions for any company faced with a crisis.  The company, its management team and any business consultant who is retained for this purpose, however, will be much better positioned to answer these questions and adopt a plan before an emergency takes place and when the owner is still available to provide input and guidance.

It’s About Leadership & Ownership

Long-term succession plans address the plan to transition the ownership of the business, and therefore go beyond providing for the continued day-to-day management of the company in an emergency.  The leadership aspect of a succession plan will vary from business to business based on industry norms. Transitioning ownership is more uniform.

Some business owners develop emergency succession plans largely on their own after receiving some input from other key leaders of the company.  In many cases, however, the business owner will find it helpful to retain an experienced business consultant who can help the owner and the company’s management team in raising questions and issues that help the owner and the team to develop and implement an emergency succession plan.  For long-term plans, including those that involve the transfer of ownership, the business owner will want to engage a sophisticated estate planning attorney who understands the tax implications involved, and also retain counsel to help draft documents that provide for the transition of ownership.

Benefits to Succession Planning

Bringing the company’s leaders and employees into the succession planning process has significant benefits.  First, requesting employees to participate in succession planning helps build loyalty to the company because it helps them to develop realistic expectations regarding the company’s prospects for success and to feel vested in that success.  Second, this type of planning helps employees to understand their roles and importance during times of emergency and also on a long-term basis.  Finally, for some of the company’s employees, the succession plan will serve as an incentive, as they come to appreciate that they will be receiving key roles in management. 

Conclusion – The Buck Stops at the Owner’s Desk

Succession planning should be a team effort to ensure that the company’s leaders feel valued in the planning process, and that they become proponents of the plan.  The business owner must lead the planning effort, however, because succession planning is not something the owner can delegate to others, even those in senior management. 

In the case of emergency succession plans, a sense of self-preservation should motivate business owners to develop this plan.  A business owner who has invested time, effort and capital in the company will want to know that he/she will still have a strong business to return to if the owner is suddenly taken away from the company for an extended time period.  Adopting an emergency succession plan provides the business owner with assurance that his/her sudden absence from the business will not jeopardize the company’s long-term road to success.


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