“GET ME A CLONE!” and Other Succession Planning Myths

We’ve all seen commercials about how insurance products will give our loved one security in the event of our demise or disability.

Hopefully, we’ve each made ourselves a savings expense category in preparation for a time when we will no longer be actively employed and we’ve obtained sufficient types and levels of insurance to address monetary issues concerning retirement, disability or demise.

But, for most of us who own a business, succession planning involves a lot more than simply purchasing some policies and saving money.

Instead, we need a realistic succession plan and a structured exit strategy that will result in a successful transition to the next generation of business owners.  How we do that will, more often than not, determine whether we remained retired or whether the business survives our departure – and, despite what the Raelians contend, cloning technology may not have advanced sufficiently by the time we really need it for us to simply clone ourselves.

This article, addresses succession planning in the context of a non-family-owned business.

The Executive Panel
On a practical level, then, how do you begin your succession plan?
Well, like every superhero, you need a sidekick – you know, that right-hand person, who, like you, has authority and knowledge to accomplish specific tasks that keep the business in forward motion.  That person must be someone you trust completely but who does not have unfettered decision-making capability – meaning, there are checks and balances in place to assure that the company is not bound by that person without the appropriate authority.  Typically, we’re talking about the vice president.

You and the second in command need to be on the same page with respect to the philosophy of the business – for example, what are your markets, how do you want to grow, what method of growth will you employ – i.e., what is the “mission statement”.

Thereafter, you need several people lower on the totem pole, each having decreasing authority to transact business for the company.  Numerous factors will come into play in deciding who will join the totem pole not the least of which involves management ability and overall competence – but those factors are not being addressed here.  Voilá, the Executive Panel!

Once developed, put the Executive Panel in writing – create a chart of the Executive Panel – publish it to everyone in the company so everyone is clear about the levels of authority.  Ideally, the Executive Panel chart should be kept with the other governance documents, whether your company is a corporation, limited liability company, partnership or proprietorship.

In large measure, the details of running the business will be delegated downward to the office manager, bookkeeper, secretary and other staff personnel with sufficient controls in place to assure that the cogs run well – if you’re a two-person shop, it means your other hat.

Buy-Sell Agreements  
So, now you know WHO but what about the HOW?
Ideally, you would want to be around for a while to test your management team, to see how they operate when you’re not around.  During that time, complete communication and disclosure among the Executive Panel must occur regularly.  The best method to assure an open line of communication is to have weekly meetings, which meetings address the owner’s vision of the company’s goals.

In the worst-case scenario, however, you’re looking to make the transition as painless as possible in the initial stages and as successful as possible in the later stages.  One way to do that is to maintain as much continuity as possible.

One of the most successful means to assure some measure of continuity and (i) that ownership control stays within the intended circle of owners; (ii) owners have an exit strategy; (iii) create liquidity for survivors of owners as well as the company; and (iv) fix the value of the ownership interest in the context of a buy-out of interests is the buy-sell agreement.

Typically, the buy-sell agreement will require the purchase (either by the remaining owners, called a “cross-purchase” or the entity, called “redemption”) of the exiting owner’s interest upon the happening of an event, which event could be divorce, disability, death or any other event.  In the context of death or disability, the requirement to make the purchase could be secured by life or disability insurance to assure that a pool of funds is available to consummate the purchase.

The buy-sell agreement gives the remaining owners the ability to effectively control their destiny and that of the business regardless of the suddenness of an event.  By setting forth such provisions as transfer to third parties, defining triggering events requiring purchase of another owner’s interest or, defining the purchase price upon the happening of a triggering event, the buy-sell agreement assures that, while other emotional and practical issues may remain, the business issues of transition upon an owner’s departure have been addressed.

Whether the Executive Panel can maintain the success of the business will in large measure depend upon whether the management style and vision are equivalent to that of departing owner’s style and visions.  However, by having established an Executive Panel, maintained the lines of communication and addressed the hard issues in the buy-sell agreement, the company has a much better chance at continued success and growth than waiting for Clonaid to clone another one of you.


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