Succession Planning Success – Do the Succession Two Step!

The phone rang one day with a call from a successful business owner. He had a problem. His huge international customers and bankers were pressuring him to develop a succession plan. This is a good problem to have but he didn’t know where to start and was too busy to figure it out on his own.

In North America seven out of 10 business owners do not have a written succession plan, according to PwC Canada. In my experience, succession planning starts in one of four places:

  • Kitchen table
  • Boardroom table
  • Hospital emergency room
  • Funeral home.

As you can see, the last two options aren’t very good.

I was engaged as the succession quarterback to drive the process and coordinate the professional advisors involved. My involvement ensured the advisors communicated in English, not their technical language. 

To help the entrepreneur get started with succession planning, we did the “Succession Two Step” and separated succession for ownership from succession for management. Separating ownership and management makes it much easier to start—and finish—a succession plan. This is a critical step to make the process simpler and faster.

In this case, we started with management because it was the easiest and best place to start. 

The purpose of the management succession plan was to free the owner, from the day-to-day operations and decisions while supporting growth. The plan was to increase control as the president but spend less time in projects and operations. 

We created an organization chart listing the current key positions and names. Next, we created a new chart for five years in the future after the company grew. Then we analyzed the gaps between the charts in terms of positions and people. Specifically, we looked at:

  • Who will make the transition to the newer and larger roles in the future?
  • Who needs training and development (hint, everyone)?
  • Who will retire or won’t make the cut and needs to be replaced?

To further enhance management and enable the president to be more effective, we established several best practices, including creating strategic plans, marketing plans, flexible budgets, capital expenditure plans, and flash reporting of sales, production, and cash flow.

One important factor was that the owner identified one or two successors for his role from the management team, although this was kept confidential (for the record, keeping this a secret is not a best practice).

Entrepreneurs with written succession plans can triple their business wealth.

The second step was to look at the ownership succession plan. Ownership succession planning is more complicated and deals with building and protecting business wealth. It includes shareholders, governance, tax efficiency for wealth transitions, and estate planning.

For future ownership, the owner invited key employees into ownership. These people then sat on the formal board. The board held regular board meetings and made important decisions together. 

To protect business wealth, we moved land and buildings into a separate holding company to whom the operating company pays rent. This provided a separate revenue stream to the owners. Tip: Always consult tax professionals on this type of transaction.

Best practices for ownership succession include establishing a formal board, having management prepare and submit reports to the board for the board’s approval. Major board responsibilities include succession planning for the owner/CEO (who may be the majority shareholder), approving major strategic and financial decisions, and risk management assessment.

Don’t let the perceived complexity of succession planning prevent you from getting started. Divide and conquer. Start with management succession and then move to ownership succession.

The entrepreneur’s customers were very pleased with the succession plan and gave the company much more business, resulting in quadrupling revenues. Bankers were pleased, too, and increased their financial support.

Going through the exercise of succession planning will be very good for your business and your wealth. And you’ll sleep better at night, too.

Full speed ahead!