Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
Published by Philip I. Lieberman, JD, MBA, CIM®, Partner & Portfolio Manager
The pandemic environment has certainly had a devastating toll in terms of public health – along with a plethora of less severe antagonisms to the conduct of daily life – but one more salubrious outcome may be that it has spurred many of us to re-evaluate our priorities and more seriously consider our long-term plans. In our advisory meetings with family business owners, we have noticed that more and more of them are thinking deeply about what they really want to do with their lives in the future, including whether, when and how they will pass their company on to the next generation. This re-energized focus on succession planning is a welcome development, because the one serious mistake business owners make on succession is procrastination. Part of that springs from our fear of mortality: few of us want to contemplate a world – or a business to which we may have devoted decades of capital, sweat and tears – without us in it. But human nature is not the only roadblock.
Business succession is a complex undertaking, involving a host of factors such as financial management, tax planning and, perhaps most thorny of all, family dynamics. And the outcomes are uncertain. The chosen daughter you have assumed will take over your company someday might decide she is more interested in following her own course; the senior manager you have relied upon for business continuity might suddenly up and quit. Moreover, many business owners have the quite understandable instinct to get the “plan” just right. (It is an important plan, after all!) But the inherent complexity and uncertainty of succession planning can make it seem like a truly daunting task – and the development of a perfect plan downright impossible. So what often
happens is that the desire to get the plan just right discourages business owners from getting started at all.
Don’t wait to plan because there are blanks to fill in; the plan will help you identify what the blanks are.
This might be an odd thing to hear from someone whose job it is to help high-net-worth individuals attain their often-lofty goals, but here goes: when it comes to succession planning, the perfect is the enemy of the good – if the desire for perfection holds you back from beginning the planning process. Because it is the process that’s important. Any good (not perfect) succession document the process comes up with will be a rolling plan, with a term of maybe five years or even longer. It is almost guaranteed to change with time and circumstances, because at the beginning you do not know every variable.
That is why it is vitally important to get started early, not just because a less-than-perfect plan is better than nothing, but also because it can provide you with a roadmap to doing more research and nailing down the many variables as you progress towards succession. In other words, don’t wait to plan because there are blanks to fill in; the plan will help you identify what the blanks are. That also means you must revisit the process frequently to adjust your plan as events dictate. Just as in life nothing is written in stone, neither should a succession plan be inflexible.
I like to think of the ideal succession process as a flow chart or a decision tree. At every step in the plan, there are choices to be made as more information becomes available. The process starts with assembling an opportunity set, which is an exercise in information-gathering. You might begin by looking at candidates internally (within the business or your family) and externally (outside executives). Now ask whether they are really the right people. Are they qualified? Do they have the right proficiencies? And are they interested in taking over the business? If the answer to any of those questions turns out to be no, then what are you going to do?
It is important to recognize that you do have options. Let’s say you want your daughter to take over ownership and management of your business. If she is qualified and interested in doing so, then great – your job is largely done. But what if she is not interested? Then you have choices to make. You could decide to bring in professional management and structure a compensation plan that includes profit-sharing or other performance-based incentives. Meanwhile, you could provide your child with shares from which she will earn dividends and build wealth off the business over time, while your managers still get paid well. Alternatively, you could decide to call it a day and monetize your company, then ensure the financial well-being of your daughter through your estate plan.
But what if your child is interested in taking over the company but is not, in your judgment, qualified to do so? You might choose to follow one of the options we just discussed – which could lead to some difficult conversations with your kid about your assessment of her abilities! But there might also be a middle way. You could, for instance, work with her to ensure she acquires the expertise to manage the business effectively. That may require working in the industry (perhaps for a competitor?) to gain more valuable experience, or perhaps going back to school to hone her skill set. And it will certainly require time.
Of course, if you have several children or other potential successors in mind, the decision tree becomes more intricate, but the process is the same. Identify the opportunity set, then narrow down your choices as more information comes in. Which leads to a point worth re-emphasizing when it comes to succession planning: start early and do it often. Do not wait until a year or two before you want to exit, which could force you into making difficult choices because less painful alternatives evaporated while you were waiting. In short, the sooner you have a big-picture plan that has the flexibility to take different forms, the better. The plan itself does not have to be perfect – it would very rarely attain perfection anyway. But with foresight, flexibility and time, your succession planning process can.