Millions were glued to the screen for multiple episodes and seasons of “Succession,” watching the agony of a major corporation with nowhere to go when its charismatic leader was gone. It might have worked for binge streaming but, in real life, a failure to plan doesn’t end with the director yelling, “That’s a take.”
Too many companies rest their future on a handshake and promise to “deal with it later.” When later is now, it’s too late.
Three Reasons a Succession Plan Now Is Crucial
Effective succession planning is essential for a small or closely held company because of:
- Business continuity: Continuity ensures the company functions successfully in all capacities if any key individual departs.
- Financial stability: This is often connected to one or more of the key individuals. A sudden departure without a plan could impact everything from a company’s credit rating and its stock price to customer confidence and employee loyalty.
- Strategic alignment: Setting the strategic alignment helps the succeeding leadership maintain long-term strategic goals and align the company’s future with key individuals’ vision.
Succession planning marries the company’s future with strategic operations, financial health and relationships with both customers and employees. Think of it as a prenuptial agreement or estate plan when unexpected circumstances occur.
When a Company Needs Its First Succession Plan
When the growth trajectory is in sight, or investors are sought, it’s time for a succession plan.
No matter the key individuals’ ages, a severe accident, divorce, debilitating illness or premature death can cripple a company without a torch-passing strategy. A decision to part ways, desire to start a second act or plans to stop working also come into play.
Before any business-changing events occur, a succession plan helps cut tax liabilities, keeps the company on its trajectory and assures investors, employees, lenders and customers that all is ready to stay the course, grow and continue to prosper.
In the case of a family business, the succession plan must be part of a well-planned estate. Company value and ownership are often overlooked when there are ways to smooth the process and ensure transfers go where intended.
Five Elements of the Comprehensive Succession Plan
Defining the future: Most think of the plan as identifying who inherits leadership roles when a key individual leaves. But assigning essential roles within the organization goes beyond just naming the new CEO or high-level executives. The plan must incorporate the members’ personal and family financial goals.
Setting contingency plans: A good plan considers planned transitions such as retirement and unexpected situations such as untimely death, sudden resignation, divorce or external actions like an arrest or personal bankruptcy. Short-term emergency succession plans should be planned for and in place, detailing interim steps to keep the company stable until a permanent leader is chosen.
Planning for what-if scenarios: The operating agreement and buy-sell agreement are the most common succession plan documents when the ownership involves spouses or multiple partners. Many partnerships also utilize insurance vehicles if a partner dies while the company functions. While the buy-sell agreement covers the transaction of a sale, the withdrawal event needs to be spelled out in a well-drafted operating agreement if one of the key individuals no longer wants to be involved with the company.
Taking the leadership’s estates into account: Most people do not think about what happens to the ownership of a company if it hits probate or is not adequately addressed under estate documents when the IRS and state tax collectors become involved. Without proper planning, tax demands can create an onerous financial burden on the company or the family. It’s another reason estate planning should be a part of any succession plan.
Avoiding competing objectives: Often, investors from all over the country help fund a startup. This may also mean that should a key person leave, the investors could have different objectives other than continuing the company. They may want to cash out or take over. The succession plan ensures that the company’s objectives take precedence over all others.
Making (and Working) the Plan
It’s not just a static document on the shelf; the succession plan sets the course when all are healthy, excited and happy. When it’s time to deploy the plan, its effectiveness takes the sting out of retirement, resignation, divorce, debilitation or death.
An attorney with Tempe-based Guidant Law, Scott Jensen devises estate planning, probate and trust administration solutions to help individuals, families and businesses protect and secure their assets for lasting legacies.
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