The succession planning process
Every owner, business, and situation is exceptional. There is no such thing as a plan that fits all situations and businesses. Effective succession plans share enough essential elements to provide a road map for determining what needs to be addressed. To create an effective succession plan, the owner must first consider the fitness of the current management; the incentives, if any, that exist to hire and retain good employees; and to determine if any future leaders are already on board. The successor must not be a mirror image of the current owner. Each 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 establish the talent available and whether the qualities of a good leader are obvious.
A determination as to who is the most qualified candidate should be considered. Alternatives include an initial search by the company’s board of directors, if one exists, and the use of a professional search firm. The owner may also recognize likely successors within the business.
When an owner wants a child or other relative to take over the business, it is important to conduct a rigorous screening that assesses the strengths and weaknesses of various potential candidates. Key employees who are well-versed in all aspects of the business should also be consulted. After the search is complete, the owner must make a choice. Plans fail when an owner completes the process only to decide that no one fits. This type of decision will demoralize employees and could cause some to leave. The credibility of the owner is also questioned.
The decision of who will take over must be communicated to the entire company. This step could make someone who was overlooked walk away. But the risk can be mitigated if the plan is conveyed effectively and a team approach is taken. Simply choosing a successor does not end the process. As business circumstances change, the succession plan and its effectiveness must be reassessed. This is not an opportunity for the owners to change their minds abruptly. Rather, it is an opportunity to rejuvenate the force of the plan and confirm the decisions made. The selection should change only if there is a significant change in performance or business circumstances.
The succession plan should reference other policies to be implemented by the business that address situations that will be addressed beyond the ownership succession.
Effective estate planning must identify strategies for handling urgent situations, including death, disability, or unexpected departure. By considering these situations, the owner or board will be better prepared to make informed decisions rather than frantic decisions.
Who to involve 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 advisers, bankers, legal advisers, accountants and colleagues. If the company has a board of directors, it should also be involved in establishing and executing the succession plan.
There should be a formal plan, including specific goals and objectives and defined deadlines, to allow review and evaluation of the process as it progresses. Specific tasks can be assigned to smaller groups. One such group can compare how other companies have set up plans and determine weaknesses in the companies current plan that need to be avoided.
Succession Plans and Incentives
When creating the plan, the company may determine that more expertise is needed in certain areas. Resolution of these findings could be resolved by hiring key people or retaining key people who are already part of the company. Having incentives in place that will keep these people with the company is crucial to a good plan.
Cash and stock incentives should be considered. Equity incentives can be used to retain key executives or other key employees, such as through an employee stock ownership plan. Several other stock-based plans provide incentives to hire and retain key personnel. They include stock options, restricted stock purchases, stock appreciation rights, and phantom stock plans. These incentives imply increases over time rather than a one-time change of control. They provide a program where you create a group of owners who are gradually invested in as the business succeeds. In addition to these plans, which are generally very effective, an owner can use other techniques to transfer ownership to a specific successor, either a family member or a key executive. These strategies generally involve a progressive sale of shares over time with appropriate vesting schedules. Through this plan, capital is earned and paid for in cash, utilities, or both.
Many companies employ a variety of these techniques thus creating a wide range of stock-based incentives for key employees. Each strategy requires important legal, fiscal and accounting aspects. Owners should seek the advice of legal and tax advisors to ensure that these plans are structured and implemented in the most efficient and cost-effective manner.
Evaluation and Documentation
When the plan is implemented, it must be referred to on an ongoing basis to ensure that the execution is in accordance with the plan. Senior management and the board should periodically review the plan to determine if it is still operational or requires revision. The succession plan must be as forceful as the selection process. It cannot be seen as an absolute and unalterable document. Rather, it is a developing illustration of the organization’s future needs and goals. Aspects of the plan related to transfers of ownership must be carefully documented and favorably considered. This will provide a mutual understanding of the terms and conditions of the transfer.
The company must have an effective personnel evaluation policy, which must be part of the succession plan. These policies help identify potential leaders and successors. They also provide guidance for successfully training specific employees while developing a broader and more inclusive management team.
