Fewer than one in three family-owned
and managed businesses survives into
the second generation.
“A major reason for this is the lack of succession planning,” says Steven Y. Patler,
JD, CPA, managing director with The
Prosperitas Group in Bloomfield Hills.
What will happen to your business when
you are no longer around to manage it?
Whether your business is family-owned
and managed or owned by several partners, having a succession plan will ensure
your company will continue without you. A
succession plan protects your family’s and
employees’ interests in the future, helps
preserve the reputation you’ve worked so
hard to create and builds customer and
supplier confidence that your business will
be around for years to come.
“If a founder dies or becomes ill and there
is no plan for who will take over, the survival of the business could well be at stake.
The effects on the family and employees
could be devastating,” adds Patler.
Smart Business asked Patler how owners can develop effective succession plans
in order to help avoid such a potentially
disastrous result.
Why do owners avoid preparing succession
plans?
Ninety percent of family-owned businesses are still in the founder’s control. Many
founders have had control over the business as well as the family for many years
and may not want to address giving it up. It
is part of their identity. Rationally or irrationally, they may fear that if they let go, the
business or their financial situation will
suffer. Family dynamics also are involved.
The founder may want to avoid potential
conflicts with family members. Not
addressing succession issues is a means of
avoidance. Some founders may ‘fear’
retirement and don’t know what they will
do with their time once they leave the business. Many owners think they don’t need to
address succession planning if the business is young or if they are young. But what
if they get sick or die prematurely? Finally,
there is the issue of time. It’s easy to put off
addressing potentially difficult and time-consuming matters, such as succession
planning.
What should a succession plan take into
account?
A successful plan is comprehensive and
takes into account business, financial and
tax aspects; employee and customer
needs; and the needs, goals, dynamics and
values of the family and partners. What are
the values of the company’s key stakeholders? What are their financial needs? Will
everyone be treated fairly? Are there possible successors — the owner’s children, key
employees? What are their needs and talents? Does a possible successor need mentoring to obtain the skills of a CEO? Is the
business changing? Will new skills be needed in the future? Are the children and
employees able to handle these changes, or
will a third party need to be brought in?
What about the impact on customers and
suppliers?
How does one go about having a succession
plan developed?
There are numerous professionals who
should be included in the process.
Someone, however, needs to guide the process. It may or may not be the owner,
depending on his or her skill set. It could be
someone who knows the business and has
built trust. Frequently, it is an experienced
third party who is viewed as both objective
and independent. Whoever it is, this person
should have a broad background, ability to
collaborate with all the parties and good
judgment skills.
The actual process of developing the plan
begins with interviews and fact-finding.
Next, all the information about the people
involved — e.g. goals, needs, skills — and
the business itself — e.g. valuation, financial, compensation structure, competition,
strategic plan — is analyzed. Strengths and
weaknesses are identified. It’s then common to hold a group session with all relevant parties. A recommendation can then
be made that identifies potential successors and includes strategies in developing
the skills needed by family members/
employees to lead the business. In some
instances, the planning process could also
result in the determination that the company should be sold and set forth what steps
need to be addressed to best position the
company for sale.
How often should monitoring and review take
place?
At least once every couple of years.
External changes, such as the business
environment and tax laws, may have a significant impact on a plan. Furthermore,
someone expected to take over may no
longer be willing or capable of doing so or
may no longer be an appropriate or best
choice — because of illness, divorce, etc.
Regular meetings and adjustments to the
plan, when and where necessary, will help
ensure that the business will have the right
person or persons it needs to survive and
prosper in the future.
STEVEN Y. PATLER, JD, CPA, is a managing director of The
Prosperitas Group LLC, Bloomfield Hills. Reach him at (877)
540-5777 or [email protected]. For more information, go to
www.prosperitasgroup.com.
