Implementing a business succession plan
The succession planning process
Every owner, business and situation is unique. There is no such thing as a one-size-fits-all plan for all situations and businesses. Effective succession plans share enough common ground to provide a roadmap for determining what needs to be addressed. To create an effective succession plan, the owner must first consider the ability of current management; existing incentives, if any, to hire and retain good employees; and to determine if there are future leaders already involved. The heir must not be a mirror image of the current owner. Everyone has their own skills, ideas and goals that become part of the succession plan and help the business grow. Owners should work with their advisors to determine the talent available and whether the qualities of a good leader are evident.
Consideration should be given to who is the most qualified candidate. Alternatives include an initial search by the company’s board, if one exists, and the use of a professional search firm. The owner may also recognize any potential receivers within the company.
When an owner wants a child or other relative to take over the business, it is important to conduct a rigorous review that evaluates the strengths and weaknesses of several potential candidates. Key employees who are well versed in all aspects of the business should also be consulted. Once the search is complete, the owner must make a choice. Plans fail when an owner completes the process only to decide that no one is a good fit. This type of decision will demoralize employees and may cause some to leave. The trustworthiness of the owner is also questionable.
The decision of who will take over should be communicated throughout the company. This step can cause someone who has been passed over to leave. But the risk can be mitigated if the plan is communicated effectively and a team approach is adopted. Simply selecting a successor does not end the process. As business circumstances change, the succession plan and its effectiveness must be reevaluated. This is not an opportunity for owners to suddenly change their mind. Rather, it is a chance to rejuvenate the strength of the plan and confirm the decisions made. The selection should only be changed if there is a significant change in performance or business circumstances.
The succession plan should refer to other policies that the company will implement that address situations that will be addressed outside of ownership succession.
Effective succession planning should identify strategies for dealing with emergencies, including death, incapacity or unexpected departure. By taking these situations into account, the owner or board will be better equipped to make informed decisions as opposed to rash ones.
Who to include in the succession planning process
A business owner should consult with the various advisors they have worked with over the years they have been in business. This includes financial advisors, bankers, legal advisors, accountants and colleagues. If the company has a board of directors, they should also be involved in creating and implementing the succession plan.
There should be a formal plan that includes specific goals, objectives, and defined timelines that allows the process to be carefully studied and evaluated as it progresses. Specific tasks can be assigned to smaller groups. Such a group can compare how other companies have prepared plans and identify any weaknesses that should be avoided in the company’s current plan.
Succession planning and incentives
When creating the plan, the company may determine that more expertise is needed in certain areas. Resolving these discoveries can be resolved by hiring key people or retaining key people who are already part of the company. Having incentives that will keep these people with the company is critical to a good plan.
Cash and equity incentives should be considered. Equity incentives can be used to retain key executives or other key employees, such as through an employee ownership plan. Several other equity-based plans provide incentives to hire and retain key personnel. These include stock options, restricted stock purchases, stock appreciation rights, and phantom stock plans. These incentives involve increases over time rather than a one-time change of control. They provide a program where a pool of owners is created and gradually vested with the success of the company. In addition to these plans, which usually prove to be very effective, an owner can use other techniques to transfer ownership to a designated successor, whether a family member or a key executive. These strategies typically involve the progressive sale of equity over time with appropriate vesting schedules. Through this plan, capital is earned and paid in cash, services, or both.
Many companies use a range of these techniques, thereby creating a wide range of equity-based incentives for key employees. Each strategy requires significant legal, tax and accounting issues. Owners should seek the advice of tax and legal advisors to ensure that these plans are structured and executed in the most efficient and cost-effective manner.
Evaluation and documentation
As the plan is implemented, it must be continually referenced to ensure that the implementation is in line with the plan. Senior management and the board should regularly evaluate the plan to determine whether it remains operational or needs revision. A succession plan should be as strong as the selection process. It cannot be regarded as an absolute, immutable document. Rather, it is an evolving illustration of the organization’s future needs and goals. Aspects of the plan related to the transfer of ownership should be carefully documented and reviewed favorably. This will ensure a mutual understanding of the terms and conditions of the transfer.
The company should have an effective staff appraisal policy that forms part of the succession plan. These policies help identify future leaders and successors. They also provide guidance for successfully training specific employees while developing a broader, more inclusive management team.
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